Management’s going concern assessment may be significantly affected by the current economic environment. For example, a company may have a profitable track record or prior success at refinancing. However, market conditions have changed as a result of COVID-19 – e.g. financing may be significantly more difficult and more costly to obtain now. Disclosures of material uncertainties that may cast doubt on a company’s ability to continue as a going concern as well as significant judgments involved in close-call scenarios may be more frequent as a result of COVID-19, given the continued economic uncertainty. Management should critically assess the disclosure requirements of IAS 1 and consider drafting required disclosure language early in the financial reporting process. Under IFRS Standards, financial statements are prepared on a going concern basis, unless management intends or has no realistic alternative other than to liquidate the company or stop trading.
Under IFRS Standards, management assesses all available information about the future, considering the possible outcomes of events and changes in conditions, and the realistically possible responses to such events and conditions. Events or conditions arising after the reporting date but before the financial statements are authorized for issuance should be considered. IAS 1 states that management may need to consider a wide range of factors, including current and forecasted profitability, debt maturities and replacement financing options before satisfying its going concern assessment. Management assesses all available information about the future for at least, but not limited to, 12 months from the reporting date. This means the 12-month period is a minimum and management needs to exercise judgment to determine the appropriate look-forward period under the circumstances.
U.S. Regional Effects
This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘going concern.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors.
More specifically, companies are obligated to disclose the risks and potential events that could impede their ability to operate and cause them to undergo liquidation (i.e. be forced out of business). The Going Concern Assumption is a fundamental principle in accrual accounting, stating that a company will remain operating into the foreseeable future rather than undergo a liquidation. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits. The “going concern” concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. One of larger repercussions of not being a going concern are potential credit challenges. New lenders will likely be reluctant to issue new credit, or any new credit issued will be prohibitively expensive.
Regulations for ICAEW practice members and firms
Our guide to designing, implementing and maintaining an effective system of internal control over financial reporting. This new KPMG guide compares the financial reporting implications going concern meaning of the CARES Act under IFRS to US GAAP. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work.
About the Author
