Going concern considerations in the current environment
The coronavirus pandemic has wreaked havoc on the global economy and there are very few businesses or nonprofit organizations that have not been affected in some way. As a result, auditors, accountants, and financial statement preparers need to brush up on the existing going concern requirements to be ready to address those situations. Because of the widespread effects of the pandemic, there will likely be few exceptions where organizations do not have some amount of doubt about events and conditions being present that could indicate a going concern problem. For all audit engagements in process, the impact on the report needs to be considered, as well as the adequacy of going concern disclosures.
FASB ASC 205-40, Presentation of Financial Statements—Going Concern, provides the required going concern accounting and disclosure requirements for nonprofit organizations. Under this ASC, continuation of an organization as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation is not imminent, GAAP requires management to evaluate whether any conditions or events exist that in the aggregate raise substantial doubt about the organization’s ability to continue as a going concern. Substantial doubt is raised when it is probable an organization will not meet its obligations as they come due within one year from the date the financial statements are issued or are available to be issued.
Management’s assessment 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, such as budget shortfalls; decrease in net assets; deficit in net assets; negative working capital; negative cash flows from operations; debt covenant violations; closures or restricted access to specific locations, or complete shutdowns; layoffs or restrictions on work; employee shortages to fulfill the Organization’s Mission; or loss/delay of major donor/grant funding sources.
If, based on any of the noted factors, management concludes that there is substantial doubt about the organization’s ability to continue as a going concern, they must evaluate whether they have mitigating plans in place that can be effectively implemented that are probable of alleviating the substantial doubt within one year from the date the financial statements are issued or available to be issued.
Certain disclosures are required regardless of whether substantial doubt is alleviated, including principal conditions or events that raised substantial doubt, and management’s evaluation of the significance of the events to the organization’s ability to meet its obligations as they come due. If substantial doubt is alleviated by management’s plans, those plans are required to be disclosed.
If substantial doubt is not alleviated by management’s plans, the following disclosures are also required: Management’s plans intended to overcome the substantial doubt, and a statement in the notes that there is substantial doubt about the entity’s ability to continue as a going concern.
AU-C 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, discusses auditor responsibilities relating to going concern. GAAS requires an auditor to perform the following related to management’s going concern assessment: (1) obtain sufficient audit evidence and conclude on the appropriateness of the organization’s use of the going concern basis, (2) determine whether substantial doubt exists about the organization’s ability to continue as a going concern, (3) understand and assess management’s plans for addressing any conditions or events that raise substantial doubt (if applicable), (4) evaluate the possible financial statement effects, including the adequacy of disclosures, and (5) properly report on the financial statements, including deciding on whether to use an emphasis-of-matter paragraph.
AU-C 570 includes procedures auditors should perform throughout the audit and for the period beyond management’s evaluation. It also includes potential indicators that may raise substantial doubt, along with potential mitigation plans management may implement.
Management’s plans to alleviate substantial doubt may be difficult to form a conclusion on under current conditions as auditors will need to use judgment and knowledge of how the organization has weathered the pandemic through the time the assessment is performed. It will also be difficult to rely on any future projections provided by management as those amounts may not be available or reliable and could change significantly depending on future events.