The pandemic-fueled rise of going concern risk has been saved
Perspectives
The pandemic-fueled rise of going concern risk
5 key things to know as you evaluate your company
Evaluating your company’s ability to continue as a going concern may not have been a significant challenge in past years. But the pandemic is making it hard for CFOs to predict what’s coming next week, let alone next year. If your organization is facing increased going concern risk, it’s critical to prepare for what may lay ahead.
Going concern’s growing presence
For many companies, demonstrating the ability to continue as a going concern has not historically been a major burden. In 2017, the Financial Accounting Standards Board (FASB) issued ASU 2014-15, stipulating that it is a company’s responsibility, not solely its auditor’s, to assess its ability to continue as a going concern. Even so, a quick look at sales projections, fixed costs, and financial obligations was often confirmation enough that a business could confidently say it would still be able to meet its obligations as they becoame due over the next 12 months. For many CFOs and their teams, it was one of the simpler steps of completing annual financial statements.
COVID-19 has disrupted this process.
Going concern risk in a pandemic
The economic impacts of the global pandemic have been massive. Consumers have stayed home. Supply chains have been interrupted. Entire industries have been shut down. Companies that have never before struggled to demonstrate their financial health are taking a hard look at the possibility of expressing doubt about their future. What has happened was unpredictable, and what’s ahead is uncertain.
As a CFO, disclosing doubt about your company’s ability to continue as a going concern is an action you hope you never have to take. But it’s an action that, for most companies, is more likely today than it was a year or two ago. If indicators of going concern problems have you mulling over such a move, you certainly aren’t alone.
A disclosure of doubt about your company’s ability to continue as a going concern is no small thing. To effectively deal with its ramifications, you should keep several key things in mind.
Going concern risk is often interpreted by the market as a negative signal. It can make stakeholders more wary and willing investors more scarce. Even if things were going well right before the pandemic, and the forces behind your doubt are transparent and widely applicable, there may still be a shift in the perceptions of key stakeholders.
Evaluating your ability to continue as a going concern is part of adhering to US Generally Accepted Accounting Principles (GAAP). Not disclosing doubt when you should can have serious consequences and even result in litigation. If you conclude doubt about your company’s ability to continue as a going concern exists, you don’t get to choose whether to disclose it. But you do have a choice in how you handle the run-up to and execution of that disclosure.
Engaging your audit committee, board of directors, and other key figures early and often about indicators of going concern problems is an important component of the CFO’s role during that run-up to disclosure. If you have doubts about your company’s ability to continue as a going concern for the next year due to COVID-19, these stakeholders need to be informed as soon as possible to help enable productive discussions and avoid surprises.
Determining your company’s ability to continue as a going concern is ultimately about its ability to meet obligations as they come due based on what’s known and knowable. But the economic environment during COVID-19 has been defined by its uncertainty. It is difficult for CFOs to know what the situation will be next week, let alone next year. That’s why it’s especially critical right now for companies to focus on evaluating whether there is substantial doubt about their ability to continue as a going concern.
Typically, when a company discloses doubt about its ability to continue as a going concern in its financial statements, there might be one or two issues causing doubt (such as a debt covenant that, if violated, accelerates the due date of long-term debt). Mitigation plans may be included that would aim to address those issues. But the uncertainty of COVID-19 and its economic impact has created the need for robust mitigation plans that address many hypothetical situations and can be implemented if necessary.
The pandemic’s future impacts are unknowable. And progress toward normalcy isn’t linear. Things may be trending well one day, but an unexpected setback in the fight against the virus can reverse that trend.
Consider this your wake-up call
For many companies, COVID-19 has changed the determination of going concern risk from essentially a check-the-box exercise to a primary CFO focus.
With more and more companies giving additional thought to a disclosure of doubt over their next 12 months, CFOs need to understand the stakes, communicate effectively with key stakeholders, and lead their team through an informed and responsible determination and disclosure process.
Because when it comes to evaluating doubt about your entity’s ability to continue as a going concern, going through the motions won’t cut it.
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The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.
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