Question

Go-Go & Co. is preparing its financial statements for the year ended 12/31/2015. As of 12/31, the company’s current assets are less than its current liabilities. The company is evaluating whether it must comply with the Codification’s going concern disclosure requirements, established in ASU 2014-15. Locate the Codification topic that addresses this issue. Explain whether disclosure of going concern issues is currently required for Go-Go & Co, considering the transition guidance provided for this topic. Next, explain whether such disclosure will be required for the company once this guidance becomes effective. Your response should require approximately one page.

Answer 1

Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. U.S. auditing standards and federal securities law require that an auditor evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited. U.S. auditing standards also require an auditor to consider the possible financial statement effects, including footnote disclosures on uncertainties about an entity’s ability to continue as a going concern for a reasonable period of time (the American Institute of Certified Public Accountant’s Codification of Statements on Auditing Standards Section AU-C 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, or the Public Company Accounting Oversight Board’s AU Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern). The U.S. Securities and Exchange Commission (SEC) also has guidance on disclosures that it expects from an entity when an auditor’s report includes an explanatory paragraph that reflects substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time (The Codification of Financial Reporting Policies, Section 607.02).

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. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

the management should disclose the following things:

a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans) b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

The management GO Go& Co. should Go as a going concern concept they should not think of shutting it down as only current assets are less then the current liabilities. Following are some adverse conditions where the company should not adopt going concern:

Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios b. Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets c. Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, and a need to significantly revise operations d. External matters, for example, legal proceedings, legislation, or similar matters that might jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood. 205-40-55-3