Going Concern Flashcards
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. Management most likely would consider, as a mitigating factor, the entity’s plans to:
A.
repurchase the entity’s stock at a price below its book value.
B.
issue stock options to key executives.
C.
lease rather than purchase operating facilities.
D.
accelerate the due date of an existing mortgage.
Management’s plans to deal with the current situation could mitigate the adverse effects. Examples of these plans would be:
•plans to dispose of assets,
•plans to borrow money or restructure debt,
•plans to reduce or delay expenditures, or
•plans to increase ownership equity.
If management planned to lease operating facilities rather than purchase them, they would be holding off on acquiring debt to purchase a capital asset. This situation may alleviate some of the financial pressure.
When is an entity not labeled a going concern?
Only the statement, “Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent
Management should evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern:
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern 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).
If there are issues of whether or not an entity is a going concern and doubt is not alleviated, mgmt should:
include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
