Going Concern Memo Example: A Comprehensive Guide

A going concern memo is a crucial document that helps companies navigate financial difficulties. It's essentially a plan to ensure the company's survival.

The memo typically includes a detailed analysis of the company's financial situation, including its cash flow, debt, and revenue. This helps stakeholders understand the company's financial health.

The purpose of a going concern memo is to provide a clear plan for the company's recovery, which may involve cost-cutting measures, restructuring, or seeking external funding. This plan is essential for the company's survival.

A well-crafted going concern memo can help companies avoid bankruptcy and maintain their operations. It's a vital tool for companies facing financial challenges.

If this caught your attention, see: Hedge Fund Financial Statements

In preparing financial statements, management must evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued or available to be issued.

Worth a look: Non Gaap Financial Measures

The assessment period is a crucial timeframe, spanning from the date the financial statements are issued to one year later, during which management must consider current conditions and events that may impact the entity's ability to meet its obligations.

Management must consider conditions and events that raise substantial doubt about an entity's ability to continue as a going concern, which can include factors such as liquidity issues, debt obligations, and declining revenue.

Substantial doubt about an entity's ability to continue as a going concern may exist when current conditions and events, considered in the aggregate, raise substantial doubt about whether the entity will be unable to meet its obligations as they become due within the assessment period.

Management's plans to address conditions and events that raise substantial doubt must alleviate adverse concerns, or else substantial doubt does exist.

Discover more: What Is an Accounting Period Definition

The going concern assessment is a critical evaluation of an organization's ability to continue operating for the foreseeable future. This assessment is based on various factors, including financial performance, liquidity, debt obligations, cash flow projections, and other relevant factors.

Management's evaluation of an entity's ability to continue as a going concern is typically based on conditions and events that raise substantial doubt about the entity's ability to meet its obligations. This includes negative financial trends, such as recurring operating losses and working capital deficiencies.

Examples of adverse conditions and events that may raise substantial doubt about an entity's ability to continue as a going concern include defaults on loans, arrearages in dividends, and a need to restructure debt to avoid default. Management must consider the likelihood, magnitude, and timing of the potential effects of these conditions and events.

Management's evaluation of whether substantial doubt is raised does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented. If substantial doubt is raised and is not alleviated by management's plans, an entity is required to include a statement in the notes to financial statements indicating that there is substantial doubt about the entity's ability to continue as a going concern.

The going concern memo typically includes an introduction that outlines the purpose and scope of the memo, as well as a summary of the auditor's findings. The memo also includes a detailed analysis of the organization's financial position, including a review of its income statement, balance sheet, and cash flow statement.

On a similar theme: Which of the following Is Not an Example of Scaffolding?

Here are some examples of conditions and events that may raise substantial doubt about an entity's ability to continue as a going concern:

Management should consider the following when providing their assessment and supporting information to the auditors:

Management's Plans are a crucial aspect of a going concern memo. Management's plans are the strategies and actions the company intends to take to mitigate the conditions or events that raise substantial doubt about its ability to continue as a going concern.

Management's plans can include cost-cutting measures, asset sales, or obtaining new financing. These plans must be disclosed in the notes to financial statements.

The plans must be specific and detailed, outlining the expected outcomes and timelines. Management's evaluation of the significance of the conditions or events is also crucial, as it helps users of the financial statements understand the extent of the problem.

Management's plans must be disclosed in the notes to financial statements, providing information that enables users to understand the company's intentions.

The following information must be disclosed about management's plans:

Management's responsibility to evaluate and disclose conditions and events that raise substantial doubt is crucial in financial reporting.

The FASB acknowledges that disclosures required by ASC 205-40 may overlap with those required by other areas within US GAAP.

Regardless of whether substantial doubt is alleviated or not, the disclosure should be very robust to help the reader understand management's plans and the key components thereof.

A general statement that there can be no assurance that management's plans will be achieved is also required.

Management must include disclosures related to uncertainty about its ability to continue as a going concern in the notes to the financial statements in annual and interim periods until the conditions or events giving rise to the uncertainty are resolved.

The disclosures should change to provide users with the most current information, including information about how the uncertainty is resolved.

Explore further: How Is Required Return Defined

Management's assessment involves making a judgement, at a particular point in time, about inherently uncertain future outcomes of events or conditions.

Management should consider appropriation budgets, 12-month cashflow projections and forecasts, and corporate business plans including long term financial plans when providing their assessment and supporting information to the auditors.

The auditor's responsibilities include evaluating the assessment prepared by management, obtaining sufficient appropriate audit evidence about the appropriateness of management's use of the going concern basis of accounting, and concluding on whether there is a material uncertainty about the entity's ability to continue as a going concern.

A written representation from those charged with governance at the end of the audit on whether or not the use of the going concern assumption is appropriate is also required.

The auditor must ensure that the period of the going concern assessment is at least 12 months in the future from the date of the audit report.

Suggestion: Asset Management Company Financial Statements

A going concern memo is a crucial document that outlines an organisation's financial health. The memo typically includes an introduction that outlines its purpose and scope.

The content of the memo is comprehensive, covering a detailed analysis of the organisation's financial position. This includes a review of its income statement, balance sheet, and cash flow statement.

The auditor's analysis assesses the organisation's liquidity, debt obligations, and cash flow projections. This helps to identify potential issues that could impact the organisation's ability to continue operating as a going concern.

A significant event or transaction can have a major impact on an organisation's financial health, so the memo may include any notable occurrences.