Management’s Responsibility for Going-Concern Assessments

As the COVID-19 pandemic continues, many companies are experiencing one or more conditions that may be indicators of going-concern issues. Today’s uncertain conditions create particular challenges when evaluating a company’s long-term viability.

U.S. generally accepted accounting principles (GAAP) specify that management, not auditors, is responsible for assessing whether substantial doubt exists about the entity’s ability to continue as a going concern. Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, took effect in 2017.

Each reporting period, management must assess whether it’s probable the entity won’t be able to meet its financial obligations as they become due and provide related footnote disclosures. Management’s evaluation should be based on qualitative and quantitative information about relevant conditions and events that are known (or reasonably knowable) at the time the evaluation is made.

Conditions that may be going concern indicators include, but are not limited to:

• A reduction in sales due to store closures,
• A shortage of products and supplies,
• A decline in value of assets,
• Work stoppages,
• Loan defaults and debt restructuring, and
• An uninsured or underinsured catastrophe.

If management concludes that substantial doubt exists about the entity’s ability to continue as a going concern, it must consider whether mitigation plans can be effectively implemented within the one-year look-forward period to alleviate the going-concern issue(s).

As companies navigate work burdens amid the pandemic, these forecasts and projections are especially meaningful. Though COVID-19-related work restrictions have been lifted in some areas, the ongoing level of uncertainty in the marketplace makes going-concern judgments even more critical.

Making the Call

The continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern.

For more information about the going-concern assessment, contact us. We are here to help.

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