by Gabriella Krtausch
You might have been asked by your auditor “Does your entity have substantial doubt to continue as a going concern?”, but what does that mean? Is that just more auditor jargon to confuse you? The following is a break down of the going concern topic in a way that’s easy to understand.
The going concern assumption means that your entity has the ability to continue operations and meet obligations for a reasonable period of time, or at least the next 12 months. If you are not a going concern, then this means that there is doubt that you will be able to continue operations within the next year, which is not what you want.
Management is required to evaluate going concern. So, what are some common signs that you might have a going concern issue?
- Recurring significant net losses
- Being in default on loans and having bad credit
- Not being able to make payroll
- Lawsuits that could result in a large, unfavorable outcome
When it is determined that there are going concern issues, it is required to be disclosed in the notes to the report. Having this disclosure in the notes is not ideal because it may send red flags to investors, contributors, and lenders of the entity. Don’t worry, there is a way to address this. This disclosure can look less harsh if there is a solid plan to mitigate the going concern issues. This plan might include things like restructuring debt, increasing equity, delaying large expenses, and selling significant assets to generate cash flow. Once your auditor has assessed your plans and is in agreement the plans help to alleviate any doubt, the disclosure can mention this plan to help alleviate some of the concerns the financial statement users might have.