Understanding Going Concern Disclosure Example in Financial Statements

Understanding going concern disclosure in financial statements is crucial for investors, creditors, and analysts. It provides valuable information about a company's ability to continue operating for the foreseeable future.

A going concern disclosure example is required when there are indications that a company may not be able to meet its financial obligations. This can be due to various reasons such as liquidity problems, profitability issues, or significant losses.

The primary purpose of a going concern disclosure is to inform stakeholders about the potential risks and uncertainties surrounding a company's financial situation. This helps them make informed decisions about investing in or lending to the company.

A company's ability to continue as a going concern is often dependent on its ability to generate sufficient cash flows to meet its financial obligations.

Going concern disclosure is a required accounting and disclosure standard for for-profit and nonprofit entities. It's based on FASB ASC 205-40, Presentation of Financial Statements-Going Concern.

Management must evaluate the probability that the entity will not be able to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued.

This evaluation is based on qualitative and quantitative information about relevant conditions and events that are known or reasonably knowable at the time the evaluation is made.

Management must consider factors such as a reduction in sales, shortage of products and supplies, limitations in employee resources, decline in value of assets, and liquidity and access to credit.

If this evaluation results in management concluding that there is substantial doubt about the entity's ability to continue as a going concern, management must evaluate whether it has mitigation plans that can be effectively implemented within the one year look-forward period.

The FASB's use of the term probable in FASB ASC 205 means likely to occur and is consistent with its use with respect to contingencies in FASB ASC 450.

Specific disclosure requirements include the principal conditions or events that raised substantial doubt, and management's evaluation of the significance of the conditions to the entity's ability to meet its obligations.

If substantial doubt is alleviated by management's plans, those plans must be disclosed.

Going concern is a signal of trust about the longevity and future of a company.

Companies that are not a going concern represent a significantly higher level of risk compared to other companies.

Without it, suppliers, vendors, and other companies may not pay the company if there is little belief these companies will survive.

If a company is not a going concern, the company may be revalued at the request of investors, shareholders, or the board.

This revaluation may be used to price the company for acquisition or to seek out a private investor.

Companies without a going concern status may face potential credit challenges, including debt being callable and new lenders being reluctant to issue new credit.

A credit crunch can trickle down to suppliers who may be unwilling to sell raw materials or inventory goods on credit.

Management's responsibility is to determine whether an entity can prepare its financial statements using the going concern basis of accounting. This is a crucial decision that requires careful consideration of the entity's financial situation.

The auditor's responsibility, on the other hand, is to obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern basis of accounting. The auditor must conclude whether there is a material uncertainty about the entity's ability to continue as a going concern.

Management's responsibility cannot be delegated to the auditor. The auditor's role is to assess the factors that may call into question the entity's ability to continue as a going concern.

To perform this assessment, the auditor may adopt various procedures, such as reading minutes of shareholders' meetings to identify any current or potential cash flow difficulties. The auditor may also liaise with the entity's legal advisers to assess the reasonableness of management's assessments of ongoing or future litigation.

Some examples of procedures the auditor may adopt include:

A candidate should not use a 'scattergun' approach when deciding on the audit opinion to be expressed within the auditor's report.

There are three situations identified by ISA 570 in terms of the use of the going concern basis of accounting: use of the going concern assumption is appropriate but a material uncertainty exists, use of the going concern assumption is inappropriate, and management unwilling to make or extend its assessment.

If a reporting entity considers the going concern basis of accounting to be appropriate, but still has a material uncertainty present, they must make disclosure of the fact in the financial statements that there are uncertain future transactions/events that may result in the entity being unable to continue in business in the foreseeable future.

The auditor will consider the adequacy of the disclosures made in the financial statements by management.

If the auditor considers that the going concern basis is appropriate and that the disclosures are adequate, then the audit opinion will be unmodified and the auditor's report will include a section headed 'Material Uncertainty Related to Going Concern'.

The Material Uncertainty Related to Going Concern section will follow the Basis for Opinion paragraph and will cross-reference to the relevant disclosure in the financial statements.

If the auditor concludes that the disclosures are inadequate, or if management have not made any disclosure at all and management refuse to remedy the situation, the opinion will be qualified or adverse.

Reporting is a critical aspect of financial statements, and it's essential to understand the different scenarios that can arise when it comes to the going concern basis of accounting.

There are three situations identified by ISA 570, which dictate how the auditor's report should be structured.

A reporting entity that considers the going concern basis of accounting to be appropriate but still has a material uncertainty present will have to make disclosure of the fact in the financial statements.

The auditor will consider the adequacy of the disclosures made in the financial statements by management.

If the auditor considers that the going concern basis is appropriate and that the disclosures are adequate, then the audit opinion will be unmodified.

The auditor's report will include a section headed 'Material Uncertainty Related to Going Concern', which explains the uncertainty.

This section will follow the Basis for Opinion paragraph and will cross-reference to the relevant disclosure in the financial statements.

It will also state that the auditor's opinion is not modified in respect of this matter.

Here are the possible outcomes:

Expenditure commitments requiring funding can be a significant concern for companies. The consolidated entity in question has minimum expenditure commitments on its tenements falling due within one year of $X,XXX,XXX and between one to two years of $X,XXX,XXX.

These commitments are a cash outflow that the company needs to meet, and if not, it may impact their ability to continue as a going concern. The company has a cash flow forecast indicating it doesn't have sufficient cash to meet these commitments and support its current level of corporate overheads.

The directors have undertaken initiatives to address the future additional funding requirements, including discussions to secure additional equity funding from current or new shareholders. They're also monitoring the company's ongoing working capital requirements and minimum expenditure commitments.

The directors are confident they'll be able to complete a capital raising to provide sufficient funding, but if not, significant uncertainty would exist as to whether the company will continue as a going concern.

The consolidated entity has secured a new $X,XXX,XXX debt facility from [NAME] on [DATE], which will provide sufficient working capital to meet its objectives and financial obligations.

This new facility is expected to greatly benefit the entity, allowing it to manage its cash flow more effectively.

The consolidated entity made a loss of $X,XXX,XXX for the year ended 31 December 2023 and had net current liabilities of $X,XXX,XXX, but this new facility should help to alleviate some of these financial pressures.

Management expects that the operating costs will be further reduced in the succeeding financial year as a result of the restructuring of its operations, which will further increase operating cash flows.

The ultimate parent entity raised equity and debt on [DATE] which can be utilised by the consolidated entity as and if required, providing an additional source of funds if needed.

The directors are confident that the consolidated entity can continue as a going concern, as they believe no asset is likely to be realised for an amount less than the amount at which it is recorded in the financial statements as at 31 December 2023.

Going concern disclosure can have significant financial implications for a company. A company's ability to continue operating as a going concern is crucial for investors and creditors.

A lack of going concern disclosure can lead to a loss of investor confidence and a decline in stock price. This can result in financial losses for investors.

The financial impact of going concern disclosure can also be seen in the case of XYZ Corporation, which had to restate its financial statements due to a going concern issue. This resulted in a significant loss of investor confidence and a decline in stock price.

A company's financial statements should include a going concern disclosure if there is any doubt about its ability to continue as a going concern. This is because a going concern issue can have significant financial implications for a company and its stakeholders.

Going concern is a vital aspect of financial management, and it's essential to understand the significance of this concept.

The concept of going concern is crucial because it assumes that a business will continue to operate for the foreseeable future. This assumption is fundamental to financial reporting and decision-making.

To ensure that a business is indeed a going concern, management must conduct regular reviews to identify potential issues.

The auditor's responsibility is to evaluate the appropriateness of management's going concern assumption.

Indicators that an entity may not be a going concern include a history of losses, a lack of cash flow, and significant debt.

To address going concern issues, management must disclose them in the financial statements.

The auditor's report must also highlight any going concern issues that have been identified.

To prepare for the exam, candidates should practice answering exam-standard questions, as they will be tested on their ability to define and discuss the concept of going concern, explain the importance of going concern reviews, and discuss disclosure requirements.

Here are the key areas that candidates need to be aware of:

Contract liabilities can have a significant impact on a company's net current liabilities. This is because contract liabilities represent payments in advance by customers that haven't been earned yet.

In the example provided, $X,XXX,XXX of the $X,XXX,XXX net current liabilities relates to contract liabilities, which will not crystallize as a cash outflow. This means that the company doesn't have to pay this amount out of pocket.

The adjusted net current liability is $X,XXX,XXX, which is a more accurate representation of the company's current financial situation. This is a crucial consideration when evaluating a company's financial health.

The company has access to $X,XXX,XXX in financing facilities, with $X,XXX,XXX remaining undrawn and available. This can be a valuable safety net in case the company needs to cover unexpected expenses or cash shortfalls.