Abstract
The International Accounting Standards Board’s (IASB’s) Framework introduced the “going concern assumption” in 1989 (IASB Framework, Paragraph 23). Today, the first International Accounting Standard (IAS 1, par. 25), turning the going concern framework idea into a requirement, specifies the going concern assumption (IAS 1, par. 25) and precisely identifies the managers’ role (IAS 1, par. 26): management should take into account all available information and consider specific factors (current and expected profitability; debt repayment schedules, including replacement financing; etc.). Starting from the consideration of the international context, this chapter compares the current going concern assumptions as stated by the two sets of standards (International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP)) after the issuance of the new US accounting standard in 2014 (about the disclosure of uncertainties relevant to an entity’s ability to continue as a going concern).
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Notes
- 1.
“The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed” (The Conceptual Framework for Financial Reporting, 2010, par. 4.1). Moreover, the 2015 Exposure Draft entitled “Conceptual Framework for Financial Reporting” sets out the going concern assumption, which has been brought forward largely unchanged from the existing Conceptual Framework (paragraphs 3.10 and BC3.4, Exposure Draft, May 2015).
- 2.
“When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern” (IAS 1, par. 25).
- 3.
“In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate” (IAS 1, par. 26).
- 4.
“2. Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. General purpose financial statements are prepared using the going concern basis of accounting, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis of accounting is relevant (e.g., the going concern basis of accounting is not relevant for some financial statements prepared on a tax basis in particular jurisdictions). When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. (Ref: Para. A2)” (Going Concern Basis of Accounting, ISA 570, revised and effective for audits of financial statements for periods ending on or after December 15, 2016).
- 5.
“9. The objectives of the auditor are:
-
(a)
To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements;
-
(b)
To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and
-
(c)
To report in accordance with this ISA” (Going Concern Basis of Accounting, ISA 570, revised and effective for audits of financial statements for periods ending on or after December 15, 2016).
-
(a)
- 6.
“10. When performing risk assessment procedures as required by ISA 315 (Revised), the auditor shall consider whether events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern. In so doing, the auditor shall determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern, and: (Ref: Para. A3–A6)
-
(a)
If such an assessment has been performed, the auditor shall discuss the assessment with management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern and, if so, management’s plans to address them; or
-
(b)
If such an assessment has not yet been performed, the auditor shall discuss with management the basis for the intended use of the going concern basis of accounting, and inquire of management whether events or conditions exist that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern” (Going Concern Basis of Accounting, ISA 570, revised and effective for audits of financial statements for periods ending on or after December 15, 2016).
-
(a)
- 7.
A convergence in the near future is still unlikely. There are evident differences in new standards, such as the financial instrument standard (ASC 825 or IFRS 9). Specifically, IASB issued IFRS 9, Financial Instruments, which takes effect for annual periods beginning on or after January 1, 2018. The IASB and FASB worked for years to converge about financial instrument matters, but, at the moment, their efforts seem unsuccessful.
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Agostini, M. (2018). The International Accounting Convergence Promoted by IASB and FASB Regarding Going Concern Status. In: Corporate Financial Distress. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-319-78500-4_4
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