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Going Concern Uncertainties and Severe Financial Stress

going concern

Most organisations are being impacted by the coronavirus (COVID-19) pandemic, either directly or indirectly, and the increased economic uncertainty and risk may have significant financial reporting implications. A government filing for Chapter 9 bankruptcy should not be a dissolution-triggering event; instead, it should be considered an example that indicates financial difficulties and, therefore, a relevant factor to evaluate when assessing and identifying GCU. An acquisition is a form of government dissolution in which a government ceases to exist as the same legally separate entity and is acquired in exchange for significant consideration. All scenarios of severe financial stress , including SFS not to the point of going concern uncertainties and SFS to the point of GCU, and all scenarios of and going concern uncertainty , including GCU not caused by SFS and GCU caused by SFS, should be in the scope of the project.

  • The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
  • 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 been required by governmental authorities to close a number of its locations as a result of the COVID-19 pandemic, and its suppliers and customers have also been impacted by those governmental restrictions.
  • Without any significant information to the contrary, it is always assumed that the entity will be able to meet all its obligation without significant debt restructuring and continue to be a going concern entity.
  • Following is an example of an emphasis-of matter-paragraph regarding going concern when the entity is not required under the applicable financial reporting framework to include a statement in the notes to the financial statements that substantial doubt exists.

This implies that the company will not be forced to discontinue its operations and liquidate its assets at extremely low costs. The concept of going concern is relevant not only from an income statement perspective but also from a balance sheet perspective.

Related Definitions

Given the uncertainty caused by the pandemic, it is likely that some organisations, in particular those in vulnerable industries, will have to model different scenarios before being able to conclude that the going assumption is appropriate. An organisation or entity is no longer a going concern if management either intends to liquidate the entity or cease trading, or have no realistic alternative but to do so. The Board tentatively decided on the definitions of cease to be a going concern and going concern uncertainty, with two additional components to be determined in future Board discussions. Nevertheless, the application of the TOGC regime should evidently be assessed based on a thorough analysis of the underlying assets whereby the transferred assets should enable the transferee to pursue an independent economic activity. Since concrete guidelines are still lacking, the future decision of the Court of Justice may therefore shed some more light on what can actually be covered by the TOGC concept.

  • Description of the different scenarios modelled including length of government-imposed lockdowns and recovery periods, risks, conditions or dependencies for these to occur.
  • The concept of going concern is relevant not only from an income statement perspective but also from a balance sheet perspective.
  • The effects of this health crisis are continuing to unfold and the ultimate extent of the economic impacts worldwide are unknown.
  • Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.

The debt-to-equity (D/E) ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. Statements should also show management’s interpretation of the conditions and management’s future plans. Certain expenses and assets may be deferred in financial reports if a company is assumed to be a Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments.

A Business as a Going Concern

A going-concern opinion may lower stockholders’ and creditors’ confidence in the company and rating agencies may downgrade the debt which leads to an inability to obtain new capital and an increase in the cost of existing capital. When the entity is aware of material uncertainties related to events or conditions that may cast significant doubt upon its ability to continue as a going concern, additional information on the details of those uncertainties must be included in the financial report.

What does going concern mean in business?

A going concern is a business that has regained stability following a period of financial uncertainty and can now confidently trade without the threat of liquidation for the foreseeable future, typically 12 months.

The Board first discussed whether the scope of the project should include all scenarios of severe financial stress and going concern uncertainties , focus solely on addressing GCU, or focus solely on addressing SFS. The Board tentatively decided to include all scenarios of SFS, including SFS not to the point of GCU and SFS to the point of GCU, and all scenarios of GCU, including GCU not caused by SFS and GCU caused by SFS, in the scope of the project.

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There are specific disclosure requirements whether substantial doubt is alleviated or not. In either case, the required disclosures include the principal conditions or events that raised substantial doubt, and management’s evaluation of the significance of the going concern conditions to the entity’s ability to meet its obligations. If substantial doubt is alleviated by management’s plans, those plans must be disclosed. If it is not alleviated, management’s plans intended to mitigate the substantial doubt shall be disclosed.

going concern

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