Going concern: 15 questions to ask during COVID-19

Claire McAuliffe, CPA, FCCA
9/30/2020
Going Concern - Covid-19

The COVID-19 pandemic has had a far-reaching impact on the operations of many companies, regardless of size. While certain industries have been hit harder than others – hospitality, travel, and entertainment, for example – chances are your organization has experienced disruptions. From supply chain interruptions to restrictions on travel and personnel, organizations are facing many challenges. In light of those challenges, it’s critical that management brings new focus on Accounting Standards Update (ASU) 2014-15, “Presentation of Financial Statements, Going Concern (Subtopic 205 – 40)," (ASC 205 – 40). 

ASU 2014-15 and management’s responsibility

ASU 2014-15 was implemented in 2017 to make management responsible for alerting financial statement users about uncertainties surrounding an entity’s ability to continue as a going concern. Before this standard went into effect, a company’s independent auditors were already required to assess going concern under the audit standards. While the auditor’s responsibility has not changed, management’s responsibility has increased.

Think of ASU 2014-15 as an early warning system. It is management’s responsibility to sound the alarm when “substantial doubt” is raised. Consider items such as forecasting shortfalls, decreased demand for products or services, the inability to access capital, impending debt maturity or other contractual obligations, and potential liquidity and working capital shortfalls, among other factors, when assessing whether substantial doubt about continuing as a going concern has been raised at your company.

Questions management should ask and answer

Management should be prepared to answer the following 15 questions when preparing a going concern assessment during this uncertain time of COVID-19:

  1. How has the pandemic affected your revenues and your bottom line?
  2. What is your company’s cash position? Is liquidity a challenge?
  3. Does your company have the funds to meet its current operating needs?
  4. Is your debt coming due within a year?
  5. Is your company at risk of not meeting 2020 or 2021 financial covenants?
  6. If in default of loan agreements, have defaults been cured?
  7. Is your bank asking for more information than ever before?
  8. Are you preparing 13-week cash flows for your bank?
  9. Are your forecasts being constantly revised?
  10. Are your payables being stretched?
  11. If any employees have been furloughed, are they furloughed for longer than expected?
  12. If you have laid off any employees, is your company anticipating more layoffs?
  13. Is management using proceeds from the CARES Act, such as a PPP loan, to support identified liquidity issues?
  14. Do you still have some ground to cover in the execution of your COVID-19 response plan?
  15. Have your sales and operations begun to stabilize?

If substantial doubt is raised when answering these questions, management is required to perform additional analysis that might result in additional financial statement disclosures about its assessment of going concern. The going concern assessment considers the probability 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). An evaluation of an entity’s ability to continue as a going concern is required each reporting period, both at interim and annual reporting periods.

Next steps

Just because a substantial doubt is raised does not necessarily mean that the entity is going to fail. Rather, by shining a light on existing challenges, a management team can develop plans to address COVID-19 disruptions while fulfilling its obligation of full disclosure as part of the financial reporting process.

Now that we are past the initial COVID-19 shock, it’s time to start thinking ahead to the financial reporting implications.

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Claire McAuliffe
Claire McAuliffe
Managing Director