I don’t hear or see much in the news about disclosures about an entity’s going concern, but I have a feeling that this is going to become a bigger issue for certain public companies, their boards and audit committees, and their auditors. Evaluating going concern is a complicated topic – thus, in this post I am highlighting one aspect, but an important aspect. See, FASB ASU No. 2014-15, and subsequent materials relating thereto. I suspect that most people would conclude that evaluating a potential issue relating to going concern involves, or depending on the circumstances could involve, especially challenging, subjective, or complex auditor judgment – thus, potentially raising critical audit matters or CAMs. Click on the following link https://wp.me/p75iWX-fr for a prior summary post about CAMs. I digress here for one comment: in regard to CAMs, one might ask, for example, “When are the circumstances of an auditor’s judgment simply ‘challenging’ v. ‘especially challenging’”?
Going concern can generally be defined as an evaluation of the entity’s expected ability to continue as an ongoing viable going concern business entity within one year after the date that its financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). Thus, for example, obviously for some business entities it can become a question of liquidity or liquid assets v. rate of cash burn. For the purpose of this post, I am looking at this issue only from an accounting/auditing viewpoint. Many other issues can arise, such as, for example, possible shareholder, investor, and creditor rights, and possible officer, director, and shareholder or majority shareholder liability relating thereto.
Now to the single point of this post, ASU No. 2014-15 provides that when evaluating conditions and events as to whether there is substantial doubt about an entity’s ability to continue as a going concern, the “initial” evaluation does not take into consideration the potential effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, the initial evaluation might not take into consideration plans to raise capital, borrow money, restructure debt, or dispose of an asset, that have been approved but that have not been fully implemented as of the date that the financial statements are issued). Again, I digress for one comment: in the above discussion, consider, for example, how to evaluate when a matter is “approved” v. “fully implemented.”
Importantly, I note, however, that later in the going concern evaluation process, mitigating factors should be taken into consideration including, for example, the probability that management’s plans will be effectively implemented within one year after the date that the financial statements are issued, and the probability that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Thus, in the evaluation process there is a timing aspect to considering possible mitigating factors: first they are not considered, but subsequently they are considered including their probability of implementation and success. Obviously, the going concern evaluation can be or can become complicated.
With the development of CAMs, I am sensing that issues such as these will be discussed more in public and investor view.
Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.
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Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.
I am also the new Chair of the Business Law Section of the Bar Association of San Francisco.
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