Question

4b. On June 30, 2020, Lansing Company was notified by its only customer that the

Customer will no longer order its product. All existing orders are expected to be completed by May 2021. From July through December 2020, Lansing Company continued efforts to raise additional financing from venture capital groups and secure new customers. By December 15, 2020, it was evident that these efforts would not be successful.

On March 1, 2021, Lansing Company obtains the required shareholder approval for a plan of liquidation that will be completed by May 2021. Upon ceasing its operations, all employees will be terminated, and Lansing Company’s assets will be liquidated to repay its creditors. The criteria for liquidation being imminent are met under FASB ASC 205 on October 29, 2021.

Required:

a. How should Lansing Company report these facts on its December 31, 2020 financial

statements?

b. How should Lansing Company report these facts during 2021?

Answer 1

Under the FASB issued ASU 2014-15, an organization’s management must evaluate whether conditions or events raise substantial doubt about the organization’s ability to continue as a going concern for a period of one year from the date the financial statements are issued or, when applicable, available to be issued. (The one-year limit diverges from IFRS but is consistent with U.S. auditing standards.) Substantial doubt exists when conditions or events, considered in the aggregate, indicate that it’s probable (meaning likely to occur) that the organization will be unable to meet its obligations as they become due within one year.

Management’s evaluation should consider both qualitative and quantitative information about relevant conditions and events. This information includes the organization’s current financial condition, conditional and unconditional obligations due or anticipated within one year, and the funds necessary to maintain operations

If, however, management’s plans don’t alleviate the substantial doubt, the organization must indicate in the footnotes that substantial doubt exists about the organization’s ability to continue.

(a). Based on above, On December 31, 2020 Lansing company should discolse footnotes that substantial doubt exists about the organization’s ability to continue while preparation of its financial statement.

(b). During the 2021 Lansing Company should prepare its financial statement on liquidation basis rather than going concern basis and adequately disclose the following

• the nature of any departure from the ‘normal’ recognition and measurement requirements

• the nature of any reclassifications of assets or liabilities from non-current to current

• qualitative and/or quantitative information on write-ups or writedowns of assets

• key assumptions and judgements made by management

• the effect on comparatives.