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Accounting & Audit

Whose Job is it Anyway? Evaluation of the Going Concern Assumption

By May 1, 2018No Comments

What is substantial doubt about an entity’s ability to continue as a going concern? Who is responsible for evaluating going concern? When is this evaluation required? What are the reporting requirements in regards to the preparation of financial statements in accordance with generally accepted accounting principle financial statements? The above questions are important to ask as the requirements to evaluate and report on substantial doubt about an entity’s ability to continue as a going concern have recently changed.

Evaluation of substantial doubt about an entity’s ability to continue as a going concern is the analysis of whether an entity is believed to be able to continue operations for a reasonable period of time, which is typically one year after the date financial statements are issued. Ordinarily, information that significantly contradicts the going concern assumption, or the entity’s ability to continue as a going concern, relates to the entity’s inability to continue to meet its obligations as they become due.

Accounting standard update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern now requires management, not the independent auditor, of an entity to evaluate the entity’s ability to continue as a going concern and to disclose certain circumstances in the notes to the financial statements. Management should perform this evaluation at each annual and interim reporting period.

As management is responsible for the evaluation of whether there is substantial doubt about the entity’s ability to continue as a going concern, the following items should be considered when management identifies conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern:

  1. Management should consider whether its plans to alleviate the substantial doubt are effective. The plans should only be considered and disclosed in the financial statements if, within one year after the date the financial statements are issued, it is probable that the plans will:
    1. Be effectively implemented, and
    2. Mitigate or alleviate the conditions that give rise to the substantial doubt.
  2. Management should disclose the following items in the notes to the financial statements surrounding substantial doubt about the entity’s ability to continue as a going concern:
    1. Principal conditions or events that raised the substantial doubt,
    2. Management’s evaluation of the significance of those conditions, and
    3. Management’s plans that mitigated or alleviated the substantial doubt.
      1. If management’s plans do not mitigate or alleviate the substantial doubt, an express statement regarding substantial doubt of the entity’s ability to continue as a going concern must be disclosed in addition to other disclosures.

For all entities, ASU 2014-15 became effective for fiscal years beginning after December 15, 2016, and for annual period and interim periods thereafter.

For assistance in management’s evaluation of an entity’s ability to continue as a going concern, financial statement presentation, or additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

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