Going Concern Considerations in a COVID World

By Jeffrey A. Ford, Grossman Yanak & Ford LLP

Assessing an entity’s ability to continue as a going concern can be challenging even in the best of times. Assessing this in the midst of the COVID pandemic may present additional uncertainties. Nevertheless, auditors and management are required to assess if substantial doubt exists regarding a company’s ability to continue as a going concern for at least twelve months past issuance of financial statements.

Impairment Versus Distress

A company or certain assets may experience a decline in value below carrying value for many reasons, including pandemic conditions. This impairment does not necessarily indicate substantial doubt regarding going concern. Distress, indicated by diffculties in paying obligations, maintaining production, or generating revenues, may signal this substantial doubt.

Assessing Substantial Doubt

Many of the risks evaluated for going concern have been amplified by the economic fallout of the COVID pandemic, particularly in estimating whether the risks are temporary and the viability of management’s mitigation plans. Are revenue and demand declines temporary? Have margins eroded? Is there disruption in the supply chain or availability of labour? Is the company able to raise capital? Are there government relief programs that can help? Are there debt covenant violations or defaults? Can the debt be restructured? The answers to these questions may be indeterminable at this time.

What if Uncertainty Persists?

If uncertainty persists, a company effectively has two choices with regard to its financial statements. First, the statements may be modified to reflect a going concern uncertainty. Most would prefer to avoid this path. Alternatively, companies may hold issuance of their financial statements until the uncertainties can be alleviated. Audit standards provide specific guidance in addressing protracted delays in issuance. This may be a superior option for many during the COVID crisis.

Published: Auditing, Reporting & Compliance Newsletter, No. 04, Autumn 2020 l Photo: Andrew Dawson - stock.adobe.com