Going concern

Definition

Financial statements are prepared on a going concern basis unless management intends to liquidate or has no realistic alternative. Management evaluates whether conditions raise substantial doubt about the entity's ability to continue for one year after issuance, and the auditor evaluates that assessment under AU-C 570. Substantial doubt exists when it is probable the entity will be unable to meet its obligations as they come due within that period. Management's plans count only if it is probable they will be carried out and will alleviate the doubt (ASC 205-40).

Why it matters in an audit or review

Indicators include recurring losses, negative operating cash flow, covenant breaches and loss of a key customer or financing. When doubt exists, the auditor looks at management's plans, whether they are feasible, and whether disclosure is adequate, and reports on substantial doubt in a separate section of the report (AU-C 570, as amended by SAS 134), or modifies the opinion if disclosure is inadequate.

Example

Illustrative: a company has a $1,500,000 loan maturing in four months, $200,000 in cash and a $900,000 operating loss. Management's plan to refinance is unsigned, so substantial doubt is not alleviated and disclosure is required.

Common mistakes

• Looking only twelve months from the balance sheet date, not from issuance.
• Accepting a plan without evidence that it can be carried out.
• Skipping the going concern step for a profitable client.

FAQ

How long is the going concern evaluation period?

One year after the date the financial statements are issued or available to be issued, not one year from the balance sheet date.

Sources

• FASB ASC 205-40, Presentation of Financial Statements-Going Concern (ASU 2014-15)
• AICPA, AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern (as amended by SAS 134)