Search within this section
Select a section below and enter your search term, or to search all click Financial statement presentation
Favorited Content
24.5 Going concern
Publication date: 30 Nov 2023
us Financial statement presentation guide
ASC 205-40, Presentation of Financial Statements – Going Concern, requires management to assess the reporting entity’s ability to continue as a going concern.
24.5.1 Assessing going concern
Financial reporting under US GAAP assumes that a reporting entity will continue to operate as a going concern until its liquidation becomes imminent. This is commonly referred to as the going concern basis of accounting.
If a reporting entity faces conditions that give rise to uncertainties about its ability to continue to operate (e.g., recurring operating losses), it may be necessary to make adjustments in its financial statements (e.g., record asset impairment losses) and provide related disclosures. Nevertheless, financial statements should continue to be prepared using the going concern basis of accounting, even when the going concern uncertainties are significant. Disclosures may be required to alert investors about the underlying financial conditions and management’s plans to address them.
ASC 205-40 provides management with direct guidance on going concern assessments and disclosures. ASC 205-40:
- Requires management to assess going concern each annual and interim reporting period with a look-forward period of one year from the financial statement issuance date (or the date the financial statements are available to be issued)
- Defines substantial doubt (see FSP 24.5.2)
- Requires disclosures when there is substantial doubt about the company’s ability to continue as a going concern, even when an initially-identified substantial doubt is alleviated by management’s plans (see FSP 24.5.3). ASC 205-40-55-1 provides a flowchart to help navigate the accounting and disclosure requirements related to going concern assessments
View image
24.5.2 Disclosure threshold: Substantial doubt
Under ASC 205-40, the emergence of substantial doubt about a reporting entity’s ability to continue as a going concern is the trigger for providing footnote disclosure. For each annual and interim reporting period, management should evaluate whether there are conditions that give rise to substantial doubt within one year from the financial statement issuance date (or the date the financial statements are available to be issued), and if so, provide related disclosures.
The guidance indicates that conditions that give rise to substantial doubt ordinarily relate to a reporting entity’s ability to meet its obligations as they become due. The ASC Master Glossary defines substantial doubt as follows:
Definition of Substantial Doubt from ASC Master Glossary
Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).
The likelihood threshold of probable is defined in ASC 205-40-20 as “the future event or events are likely to occur,” which is consistent with how the term is used in US GAAP applicable to loss contingencies.
Management’s assessment should be based on the relevant conditions that are “known and reasonably knowable” at the issuance date (or the date the financial statements are available to be issued), rather than at the balance sheet date. This means that the assessment should consider the most current information available before the financial statements are issued (or available to be issued), requiring companies to consider all relevant subsequent events after the balance sheet date. The term “reasonably knowable” was introduced to emphasize that a reporting entity should make a reasonable effort to identify conditions that it may not readily know, but that could be identified without undue cost and effort.
Figure FSP 24-1 illustrates the look-forward period over which conditions impacting an entity’s ability to continue as a going concern should be assessed.
Figure FSP 24-1
Look-forward period
Look-forward period
View image
The definition of substantial doubt is principally based on likelihood. ASC 205-40-50-5 indicates that both quantitative and qualitative information should be considered in the assessment. The assessment of a reporting entity’s ability to meet its obligations is inherently judgmental. The guidance indicates that a reporting entity should assess relevant conditions in the aggregate, and weigh the likelihood and magnitude of their potential impact on the reporting entity’s ability to meet obligations within the assessment period.
When evaluating an entity’s ability to meet its obligations, management shall consider quantitative and qualitative information about the following conditions and events, among other relevant conditions and events known and reasonably knowable at the date that the financial statements are issued:
- The entity’s current financial condition, including its liquidity sources at the date that the financial statements are issued (for example, available liquid funds and available access to credit)
- The entity’s conditional and unconditional obligations due or anticipated within one year after the date that the financial statements are issued (regardless of whether those obligations are recognized in the entity’s financial statements)
- The funds necessary to maintain the entity’s operations considering its current financial condition, obligations, and other expected cash flows within one year after the date that the financial statements are issued
- The other conditions and events, when considered in conjunction with (a), (b), and (c) above, that may adversely affect the entity’s ability to meet its obligations within one year after the date that the financial statements are issued. See paragraph 205-40-55-2 for examples of those conditions and events.
ASC 205-40-55-2 provides several examples of other conditions to consider.
Excerpt from ASC 205-40-55-2
- Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios
- Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets
- Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, and a need to significantly revise operations
- External matters, for example, legal proceedings, legislation, or similar matters that might jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.
24.5.3 Consideration of management’s plans
If conditions give rise to substantial doubt in the initial assessment, ASC 205-40-50-6 requires management to consider its plans and their mitigating impact. In doing so, management should assess whether its plans to mitigate the adverse conditions, when implemented, will alleviate substantial doubt. Whether an initially-identified substantial doubt is alleviated or not will determine the nature of required disclosures.
ASC 205-40-50-7 sets a high bar for a reporting entity to be able to take credit for the mitigating impact of management’s plans. Management’s plans should be considered only to the extent that information available as of the issuance date indicates both of the following:
- It is probable that the plans will be effectively implemented within the assessment period
- It is probable that management’s plans, when implemented, will mitigate the conditions that give rise to substantial doubt within the assessment period
In assessing effective implementation, management should evaluate the feasibility of the plans in light of the reporting entity’s specific facts and circumstances. Management’s ability to successfully implement the plans is important in this evaluation. As discussed in ASC 205-40-50-8, generally, to be considered probable of being effectively implemented, management (or others with the appropriate authority, such as the board of directors) must have approved the plan before the issuance date.
As discussed in ASC 205-40-50-10, management should further assess its plans to determine whether it is probable that those plans will mitigate the conditions that give rise to substantial doubt. In this assessment, management should consider the expected magnitude and timing of the mitigating effect of its plans (e.g., the amount and timing of cash proceeds from the planned sale of a building) in relation to the magnitude and timing of the relevant conditions or events that those plans intend to mitigate (e.g., the amount and timing of additional cash necessary to pay down anticipated obligations).
If management concludes that the initially-identified substantial doubt is alleviated by its plans, ASC 205-40-50-12 still requires certain disclosures about the underlying conditions and management’s plans. However, such disclosures would not express that there is substantial doubt. Only if substantial doubt remains despite management’s plans does ASC 205-40-50-13 require an express statement that there is substantial doubt about the reporting entity’s ability to continue as a going concern.
ASC 205-40-55-3 provides examples of plans that management may implement to mitigate the conditions that give rise to substantial doubt and identifies the types of information that management should consider in evaluating their feasibility. The examples are not intended to be all inclusive.
- Plans to dispose of an asset or business: consider the restrictions on such disposal, such as covenants that limit disposal, or encumbrances against the asset. Also consider marketability of the asset and direct or indirect effects of disposal
- Plans to borrow money or restructure debt: consider the availability and terms of new or existing debt, existing guarantees, commitments, and subordination clauses
- Plans to reduce or delay expenditure: consider the feasibility of plans to reduce overhead or expenditures, to postpone research or maintenance, or to lease rather than purchase
- Plans to increase ownership equity: consider the feasibility of raising additional capital from affiliates or other investors, or arrangements to reduce current dividends
The guidance also clarifies that any mitigating effect resulting from a plan to liquidate the reporting entity (e.g., cash infusions through liquidation of a business) should not be considered in the assessment, even if the liquidation is probable of occurring.
24.5.4 Required disclosures
Disclosures are required if conditions give rise to substantial doubt, whether or not the substantial doubt is alleviated by management’s plans. No disclosures are required specific to going concern uncertainties if an assessment of the conditions does not give rise to substantial doubt.
Figure FSP 24-2 illustrates the disclosures required by ASC 205-40 for an entity with conditions that give rise to substantial doubt.
Figure FSP 24-2
Going concern disclosures required by ASC 205-40
Going concern disclosures required by ASC 205-40
Required disclosures |
|
As discussed in ASC 205-40-50-12, if the initially-identified substantial doubt is alleviated by management’s plans, disclose: |
As discussed in ASC 205-40-50-13, if the substantial doubt is not alleviated by management’s plans, disclose: |
|
|
|
|
|
|
|
|
As discussed in ASC 205-40-50-14, in subsequent annual and interim periods, a reporting entity should continue to provide the disclosures if conditions continue to give rise to substantial doubt in those periods. Disclosures should become more extensive as additional information becomes available about the reporting entity’s financial condition and about management’s plans. Reporting entities should provide appropriate context and continuity in explaining how conditions have changed between reporting periods. In the period substantial doubt no longer exists (before or after consideration of management’s plans), the accounting guidance indicates that companies should disclose how the relevant conditions were resolved.
24.5.5 Example application
Figure FSP 24-3 provides an example of application of the going concern guidance.
Figure FSP 24-3
Example application
Example application
Relevant conditions |
Management’s assessment results |
Management's plans to mitigate adverse conditions |
Do conditions raise substantial doubt? |
Is substantial doubt alleviated by management’s plans? |
Disclosures |
Negative financial trends No significant debt coming due within the assessment period Substantial liquid resources (cash and line of credit) |
Cash flow forecasts demonstrate the reporting entity will meet its obligations within the assessment period |
Cost cutting measures |
No, because it is not probable that the entity will be unable to meet obligations within the next year |
N/A |
No disclosures specific to going concern required |
Negative financial trends No significant debt coming due within the assessment period Limited liquid resources (cash and line of credit) |
Cash flow forecasts demonstrate the reporting entity will run out of cash (and available line of credit) within the assessment period |
Sell Division A – Plan approved by the board before the issuance date and it is probable within the assessment period that the plan:
|
Yes, because it is probable that the entity will not meet obligations within the next year – unless it sells Division A. |
Yes |
Disclose conditions, management’s evaluation, and management’s plans that alleviated substantial doubt |
Positive financial trends and positive working capital Significant debt is coming due within the next year The reporting entity does not have the ability to repay all debt at maturity The reporting entity has a history of refinancing debt and nothing indicates it cannot refinance again |
Absent a refinancing, the reporting entity would not be able to meet its obligations within the next yearWith refinancing, it would meet its obligations |
Refinance debt The plan is deemed to be probable of being implemented and probable of mitigating adverse conditions |
Yes, because it is probable that the entity will not meet its obligations within the next year – unless it refinances |
Yes |
Limited incremental disclosures: refer to debt footnote, mention the plan to refinance |
Negative financial trends and limited liquidity Significant debt is coming due within the next year The reporting entity does not have the ability to repay all debt at maturity The reporting entity does not have a history of refinancing debt |
Absent a refinancing, the reporting entity will not meet its obligations within the next year With refinancing, it would meet its obligations |
Refinance debt Plan is not probable of being implemented due to negative financial trends and lack of refinancing history |
Yes, because it is probable that the entity will not meet its obligations within the next year – unless it refinances |
No |
Express that there is substantial doubt. Also disclose conditions, management’s evaluation, and management’s plans. |
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
