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Concerned about going concern: when do entities in liquidation

Concerned about going concern: when do entities in liquidation

This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy.

Going concern

As an example, many dot-coms are no longer going concern companies after the tech bust in the late s. Accountants use going concern principles to decide what types of reporting should appear on financial statements.

Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost.

A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.

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Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products. Listing of long-term assets normally does not appear in a company's quarterly statements or as a line item on balance sheets.

Listing the value of long-term assets may indicate a company plans to sell these assets. A firm's inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later. Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern.

In general, an auditor examines a company's financial statements to see if it can continue as a going concern for one year following the time of an audit.

Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.

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Your Money. Personal Finance. Your Practice. Popular Courses. What Is Going Concern? Key Takeaways Going concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future.

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Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern. If a company is no longer a going concern, it must start reporting certain information on its financial statements.

Negative trends that lead to no longer being a going concern include denial of credit, continued losses, and lawsuits. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Core Earnings Core earnings are derived from a company's main business, excluding nonrecurring income or expense items that lie outside normal activities.

What Is an Exceptional Item? An exceptional item is an unusual business cost or source of revenue that is reported separately from ordinary expenses or receipts.Questions were also raised about whether the actual requirements regarding going concern assessment and reporting included in various financial reporting frameworks were indeed adequate.

However the going concern assessment undertaken for financial reporting purposes is not intended to provide a guarantee that the company will remain a going concern until the next accounts are issued. Nevertheless, beside the high profile cases that attract the attention of the media and of the general public, the audit of going concern is reported by the audit regulators and supervisory bodies in various jurisdictions to be one of the most problematic areas of the audit process, one where the work performed by audit firms often results insufficient or unsatisfactory, particularly in relation to the audit of smaller entities.

This shortfall is likely to derive from a number of factors, probably including underestimation by directors and auditors of the importance of the relevant going concern requirements, and it is of particular concern in respect of a matter that is a catalyst of public attention and that is capable of significantly affecting business confidence. When financial statements are prepared on a going concern basis, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business, as it is assumed that the entity will continue in business in the foreseeable future.

There is often confusion, or a lack of awareness, about the roles of management and auditors in the assessment of going concern and the related reporting process in the financial statements, which arise from the separate requirements of the applicable financial reporting framework and of the auditing standards, and it is therefore worthwhile outlining them.

Going concern is a fundamental assumption that generally underlies the preparation of the financial statements of all companies. As already mentioned, under such assumption an entity is viewed as continuing in business for the foreseeable future and therefore it accounts for its assets and liabilities on the basis that it will be able to realize and discharge them in the normal course of business rather than in a winding up.

In accordance with both frameworks, directors are required to satisfy themselves that it is reasonable for them to conclude that it is appropriate to prepare financial statements on a going concern basis.

The going concern assessment required to be performed by directors should consider all the facts and circumstances about the foreseeable future of a company known at the date of approval of the accounts. The level of detail of the assessment and extent of procedures required would vary in accordance with the size and complexity of the entity. Larger companies or those with more complex business models may need substantially more procedures as part of the going concern assessment, such as annual reviews of medium and long-term plans, analysis of the major aspects of the economic environment in which they operate market size, market share, competitors etc.

The period of time that needs to be considered by directors for assessing going concern is not set at a maximum by the accounting standards. However the GAPSE provide that management should disclose in the accounts where the period considered in making its assessment is less than twelve months from the balance sheet date. Under IAS 1 there is instead a requirement that the period considered should not be less than twelve months from the end of the reporting period.

concerned about going concern: when do entities in liquidation

Whilst the review period under the GAPSE may be less than twelve months from the balance sheet date, when that is the case, ISA requires the auditor to request management to extend its assessment period to at least twelve months from the balance sheet date. Additionally management should duly take into account relevant events and conditions beyond the minimum period of assessment prescribed by the standards to satisfy themselves as to whether the use of the going concern basis is appropriate.

When conducting their going concern assessment, the directors will have to evaluate which of three potential conclusions is appropriate to the circumstances of the company. In particular they may conclude that:. Both the GAPSE and IFRS require directors to make disclosures about the existence and the nature of material uncertainties that lead to significant doubts about going concern.

A material uncertainty is one whose potential impact and possibility of occurrence is so significant that appropriate disclosures of the uncertainty are necessary for the financial statements to give a true and fair view, i. The specific disclosures that should be made are not codified in the standards but they should outline the facts and circumstances that create the uncertainties in a clear manner and should also include an indication that the company may be unable to realise its assets and discharge its liabilities in the normal course of business.Assessing the effect of the COVID restrictions and the resultant sharp economic downturn on key items, such as goodwill, asset values, recoverability of debtors and recognition of revenue, will be extremely challenging for entities in the first instance, and then for the auditors.

Perhaps even more challenging, auditors will be assessing whether the entity is a going concernand this may be the first time many finance teams or directors will have considered the question in detail. The going concern assumption underpins the basis of preparation of the financial report, unless the entity is being wound up, in which case the financial report is prepared on a liquidation basis. While some businesses have traded through the crisis, others are in hibernation, hoping to come back to life as restrictions ease.

There are significant uncertainties on the road ahead for many businesses. Even though COVID presents a very uncertain economic environment, it does not mean auditors can simply issue modified reports as a default position. These fall into four key considerations, which are equally valuable for entities and stakeholders to consider. A provider of essential services may not be negatively impacted, but the positive impacts may be short lived.

The usual red flags are operating losses, a net current liability position, net cash outflows from operations, the company being monitored closely be external lenders, or failures in capital raising. This will be the case where the auditor has spent considerable audit effort in evaluating the going concern assumption. If there is insufficient evidence to establish if there is a material uncertainty and the issue is pervasive, as going concern impacts most of the financial statements, the auditor may then need to issue a disclaimer of opinion.

However, in the current environment, management may simply not have sufficient information to determine whether or not the entity has a material uncertainty, even with extensive scenario planning. If there is sufficient information to determine that a material uncertainty exists, the auditor needs to then determine whether the use of the going concern basis of accounting is appropriate.

Going Concern Accounting and Auditing

This can create difficult conversations between the auditor and the entity, as entities are understandably reluctant to conclude they are no longer a going concern. The reality is, however, that the auditor needs more than verbal representations to draw a conclusion. The auditor may be placed in a situation where they cannot confirm whether the going concern basis of accounting is appropriate.

Michael Gummery, an audit partner at HLB Mann Juddpoints out that where going concern is based on a requirement to raise future funds, in the past it has often been possible to assess the reasonableness of budgeted future capital raising, especially where the entity has a past history of successfully doing so. He notes that given current market conditions, the likelihood of successful future capital raising may be less certain for some entities, particularly unlisted entities that may be raising on future capital through private equity or other means.

The auditor may conclude that the going concern basis of accounting is inappropriate; for example, if the entity has a significant loan repayment in the forthcoming reporting period that it will not have the cash flow to repay, and the bank has confirmed it will not be extending the terms. If the entity still prepares the financial statements on a going concern basis, the auditor is likely to have to issue an adverse opinion. If the going concern basis of accounting is still appropriate, the auditor needs to consider whether any material uncertainty exists, and ensure the basis for the conclusion by the entity that it is a going concern is appropriately disclosed.

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This disclosure would normally be in the basis for preparation paragraph in note 1 to the financial statements. If the impact is pervasive, it may necessitate an adverse opinion. The basis of qualification or adverse opinion should set out why the disclosure is inadequate or misleading.The possibility of going concern sales in liquidations, visualised by adjudicating authorities in several early cases, received regulatory recognition by way of the Insolvency and Bankruptcy Board of India IBBI Liquidation Process Second Amendment Regulations, Since then, there has been substantial discussion on how exactly a going concern sale will work in liquidation.

Recently, the IBBI released a draft of the amendments to the Liquidation Regulations, which includes regulatory amendments pertaining to going concern sale as well. This post highlights the need to have a relook at these proposed amendments in context of going concern sale.

Liquidation Basis Accounting and Reporting

In liquidation, the legal entity owning the concern ceases to exist, but if the concern can be saved from being dismembered and sold in pieces, the concern must be saved. The idea of social advancement is to preserve what has been painstakingly created, as long as it is of contemporaneous value.

A going concern sale GCS in liquidation is different from schemes of arrangement while in liquidation. The schemes are an alternative to liquidation — if the scheme succeeds, it will obviate liquidation altogether.

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GCS in liquidation is merely one of the modes of disposal of the assets of the entity in liquidation and, therefore, is an act in furtherance of liquidation. It is not, unlike the schemes of arrangement, an alternative or a way out of liquidation.

concerned about going concern: when do entities in liquidation

Rather, GCS is carried out by the liquidator as a part of the liquidation of the liquidation estate. This is clear from regulation 32 of the Liquidation Regulations, which stipulates that the liquidator may sell: a an asset on a standalone basis; b the assets in a slump sale; c a set of assets collectively; d the assets in parcels; e the corporate debtor as a going concern; or f the business of the corporate debtor as a going concern.

The key objective in GCS may be preservation of contractual and intangible assets. Often, these assets may be of tremendous value in a business, and in a slump sale it may be difficult to transfer intangibles, particularly the benefit of contracts such as concessions, leases, supply agreements, and so on. As is evident, while the former option is to sell a company in totothe latter option calls for identification of distinct undertaking s existing with the company and possible sale thereof — the difference is merely of extent and pervasiveness.

However, conventional GCS in liquidation especially of insolvent entities is itself a paradox — as discussed below; therefore, one may have to think beyond conventional parameters to have an effective framework.

GCS may have different forms and manifestations in different context.

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Under accounting standards, the meaning of a going concern is a concern that is expected to remain alive, at least over the financial year. The presumption is that the concern has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operations. That meaning will be completely ousted in case of liquidation, as the concern is, by definition, already dead. From the perspective of goods and services tax GSTthe transfer of business as a going concern as a whole or an independent part thereof is being viewed as supply of service and that such supply of service is exempt from GST.

There have been rulings, both in India and elsewhere, that have highlighted the features of a going concern sale from GST perspective. The transfer of business as a going concern is a well-known concept under the Income Tax Act, also, and has been analysed in various tax rulings as well.

Therefore, it is important to understand that the meaning of term takes on a different colour in different contexts. Further, as may be observed, laws have carved out favourable exemptions in respect of GCS.By Charles Hall Accounting. Are you preparing financial statements and wondering whether you need to include going concern disclosures? This article summarizes in one place the new going concern accounting and auditing standards.

For many years the going concern standards were housed in the audit standards—thus, the need for FASB to issue accounting guidance ASU It makes sense that FASB created going concern disclosure guidance. After all, disclosures are an accounting issue.

How to Assess Going-Concerns

This standard was effective for years ending after December 15, GASB 56 was issued in March As you will see below, this timeframe is different from the one called for under ASU This SAS is effective for audits of financial statements for periods ending on or after December 15, In the past, the going concern decisions were made by auditors in a single step.

Now, it is helpful to think of going concern decisions in two steps:. FASB defines going concern with the words substantial doubt. So, how does FASB define substantial doubt?

concerned about going concern: when do entities in liquidation

Probable means likely to occur. If for example, a company expects to miss a debt service payment in the coming year, then substantial doubt exists.

Management should consider the following factors when assessing going concern:. Moreover, management is to consider these factors for one year. But from what date?

The financial statement preparer i.

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So, if December 31,financial statements for a nonpublic company are available to be issued on March 15,the preparer looks forward one year from March 15, If no, then substantial doubt does not exist.

As you would expect, the answer to this question determines whether going concern disclosures are to be made and what should be included.

If substantial doubt does not exist, then going concern disclosures are not necessary. This decision determines the disclosures to be made. The required disclosures are based upon whether:. Rather than using the term substantial doubt, consider describing conditions e. An example note follows:. Note 2 — Company Conditions. However, management is working to obtain new long-term financing. It is probable that management will obtain new sources of financing that will enable the Company to meet its obligations for the twelve-month period from the date the financial statements are available to be issued.Click to expand menu items Click to collapse menu items.

The following auditing standard is not the current version and does not reflect any amendments effective on or after December 31, This section provides guidance to the auditor in conducting an audit of financial statements in accordance with generally accepted auditing standards with respect to evaluating whether there is substantial doubt about the entity's ability to continue as a going concern.

Ordinarily, information that significantly contradicts the going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited hereinafter referred to as a reasonable period of time.

The auditor's evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor's report. Information about such conditions or events is obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management's assertions embodied in the financial statements being audited, as described in Auditing Standard No.

The auditor should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time in the following manner:. The auditor is not responsible for predicting future conditions or events. The fact that the entity may cease to exist as a going concern subsequent to receiving a report from the auditor that does not refer to substantial doubt, even within one year following the date of the financial statements, does not, in itself, indicate inadequate performance by the auditor.

Accordingly, the absence of reference to substantial doubt in an auditor's report should not be viewed as providing assurance as to an entity's ability to continue as a going concern. It is not necessary to design audit procedures solely to identify conditions and events that, when considered in the aggregate, indicate there could be substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

The results of auditing procedures designed and performed to achieve other audit objectives should be sufficient for that purpose. The following are examples of procedures that may identify such conditions and events:.

In performing audit procedures such as those presented in paragraph. The significance of such conditions and events will depend on the circumstances, and some may have significance only when viewed in conjunction with others. The following are examples of such conditions and events:. If, after considering the identified conditions and events in the aggregate, the auditor believes there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time, he should consider management's plans for dealing with the adverse effects of the conditions and events.

The auditor should obtain information about the plans and consider whether it is likely the adverse effects will be mitigated for a reasonable period of time and that such plans can be effectively implemented. The auditor's considerations relating to management plans may include the following:. When evaluating management's plans, the auditor should identify those elements that are particularly significant to overcoming the adverse effects of the conditions and events and should plan and perform auditing procedures to obtain evidential matter about them.

For example, the auditor should consider the adequacy of support regarding the ability to obtain additional financing or the planned disposal of assets. When prospective financial information is particularly significant to management's plans, the auditor should request management to provide that information and should consider the adequacy of support for significant assumptions underlying that information.

The auditor should give particular attention to assumptions that are—. The auditor's consideration should be based on knowledge of the entity, its business, and its management and should include a reading of the prospective financial information and the underlying assumptions and b comparing prospective financial information in prior periods with actual results and comparing prospective information for the current period with results achieved to date.

If the auditor becomes aware of factors, the effects of which are not reflected in such prospective financial information, he should discuss those factors with management and, if necessary, request revision of the prospective financial information. When, after considering management's plans, the auditor concludes there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, the auditor should consider the possible effects on the financial statements and the adequacy of the related disclosure.

concerned about going concern: when do entities in liquidation

Some of the information that might be disclosed includes—. When, primarily because of the auditor's consideration of management's plans, he concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time is alleviated, he should consider the need for disclosure of the principal conditions and events that initially caused him to believe there was substantial doubt.

The auditor's consideration of disclosure should include the possible effects of such conditions and events, and any mitigating factors, including management's plans. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph following the opinion paragraph to reflect that conclusion.

An example follows of an explanatory paragraph following the opinion paragraph in the auditor's report describing an uncertainty about the entity's ability to continue as a going concern for a reasonable period of time. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the auditor concludes that the entity's disclosures with respect to the entity's ability to continue as a going concern for a reasonable period of time are inadequate, a departure from generally accepted accounting principles exists.

This may result in either a qualified except for or an adverse opinion.The going concern principle is the assumption that an entity will remain in business for the foreseeable future. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.

An entity is assumed to be a going concern in the absence of significant information to the contrary. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party.

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 impairedwhich may call for the write-down of their carrying amount to their liquidation value. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup valuesince a going concern can potentially continue to earn profits.

The going concern concept is not clearly defined anywhere in generally accepted accounting principlesand so is subject to a considerable amount of interpretation regarding when an entity should report it.

Negative trends in operating results, such as a series of losses. Loan defaults by the company. Denial of trade credit to the company by its suppliers. Uneconomical long-term commitments to which the company is subjected. If there is an issue, the audit firm must qualify its audit report with a statement about the problem. It is possible for a company to mitigate an auditor's view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed.

By doing so, the auditor is reasonably assured that the business will remain functional during the one-year period stipulated by GAAS.

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