The coronavirus pandemic (COVID-19) has been an unprecedented public health threat for all of us. Significant developments and spread of COVID-19 did not begin to take place until January of 2020. The World Health Organization (WHO) did not characterize COVID-19 as a pandemic until March 11, 2020. The pandemic has affected numerous economic sectors, resulting in serious damages and potentially long-term economic disruptions and other consequences.
As seen in the graphic above, beyond financial reporting, the going concern concept is vital to running an entity and the various users of its financial statements (partners, shareholders, lenders, regulatory agencies, or other stakeholders). Therefore, to the extent that an entity is significantly affected by any of the above conditions, it must be proactive to mitigate the potential impact that may cause significant deterioration in their operating results and financial position. Consequently, entities and their accounting practitioners may need to consider recent pertinent information related to their assessments of continuing as a going concern, as well as reporting and disclosure implications resulting from the COVID-19 pandemic and its economic fallout.
Why is it important?
Financial statements are generally prepared under the assumption that the entity will remain a going concern. An entity is expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business ( Accounting Standards Codification Topic 205, Presentation of Financial Statements — Going Concern).
In each reporting period, management is responsible for evaluating the going concern assumption. Doubts about continuing as a going concern arise when it’s probable 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. Even if liquidation is not imminent, conditions and events may exist in which, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern.
After the identification of conditions or events (i.e. COVID-19 and its resulting impact to entities) that raise substantial doubts 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, the assessment is a two-step process:
The impacts of COVID-19 continue to evolve and there are a significant number of unknowns. We are already seeing a prevalent economic impact on most, if not all countries. While the implications of COVID-19 may not automatically result in the existence of going concern uncertainties, there is a perceived increase of risk of significant doubts depending on the nature of the conditions and/or industry in which the entity operates and the availability and reliability of its plans intended to mitigate the adverse conditions. It is expected that this will result in more pressure for each entity to continue to evaluate the going concern by setting up more robust procedures to acclimate to and continue to identify the implications from the advancing COVID-19 situation.
Management needs to start thinking about or revisit how it will assess or continue to assess the impact of current and sustained economic disruptions on the operations, liquidity, and ultimately, the entity’s ability to continue as a going concern. This could involve the preparation of detailed scenarios and planning across a wide variety of activities, locations, business units, etc. within the entity. A comprehensive risk assessment is a starting point in order to develop a well-documented, effective and feasible mitigation plan.
While some companies may avoid the detrimental effects from the COVID-19 pandemic, it is important to discuss these effects with your business advisors and accounting practitioners to help further understand how the evaluation will affect the financial statements and reporting, especially if the Company does not have significant mitigating factors to alleviate going concern doubts. For instance, the result may be undesirable for the financial statement users (i.e. adding an emphasis of matter paragraph to the audit opinion or issuing a qualified or adverse opinion when evaluation of going concern and/or disclosure is not adequate).