Going Concern Uncertainties and Severe Financial Stress

If the accountant believes that an entity may no longer be a going concern, then this brings up the issue of whether its assets are impaired, which may call for the write-down of their carrying amount to their liquidation value, and/or the recognition of liabilities that arise on account of the entity’s imminent closure . 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. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

On the other hand, inappropriate use of the Going Concern assumption by an entity may cause the auditor to issue an adverse opinion on the financial statements. This Guidance provides a framework to assist directors, audit committees and finance teams in determining whether it is appropriate to adopt the going concern basis for preparing financial statements and in making balanced, proportionate and clear disclosures. Separate standards and guidance have been issued by the Auditing Practices Board to address the work of auditors in relation to going concern. The reporting entity’s government-wide financial statements should display information about the reporting government as a whole distinguishing between the total primary government and its discretely presented component units as well as between the primary government’s governmental and business-type activities. The reporting entity’s fund financial statements should present the primary government’s major funds individually and nonmajor funds in the aggregate.

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The legally required funds do not always meet GAAP standards for external reporting. So, while the local governments are required to follow their legal requirements, they will have to make some adjustment to their fund structure for external financial reporting.

The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods. The going concern assumption is a fundamental assumption in the preparation of financial statements. Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations.

Reporting implications of Canadian Auditing Standards (CAS): 2nd edition

Revenues should be recognized in the accounting period in which they become available and measurable. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term liabilities, which should be recognized when due. Code Capital Projects Funds – should be used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities or other capital assets. Capital outlays financed from general obligation bond proceeds should be accounted for through a capital projects fund.

• But there are also some disadvantages, such as the potential for management fraud if shareholders believe a company is no longer viable.
• It may be necessary to obtain additional information about such conditions and events, as well as the appropriate evidential matter to support information that mitigates the auditor’s doubt.
• The going concern assumption is a basic underlying assumption of accounting.
• This budget was also historically a balanced budget, estimated revenues equaling appropriations.

https://www.bookstime.com/ reporting under US GAAP assumes that a reporting entity will continue to operate as a going concern until its liquidation becomes imminent. The topic of going concern is especially relevant today, given the many uncertainties resulting from the current health and economic crises. Companies of all sizes in all industries are faced with closures of specific locations or complete shutdowns, employee layoffs and restrictions on work, liquidity issues, and disruptions to their supply chains and customers.

Procedures

If substantial doubt is alleviated, the auditor also should document the conclusion as to the need for disclosure of the principal conditions and events that initially caused him or her to believe there was substantial doubt. Going concern is a fundamental assumption that underlies the preparation of the financial statements of all UK companies.