The continuation of an entity as a business continuity is considered the basis for financial reporting unless and until the liquidation of the entity becomes imminent. Preparation of financial statements under this assumption is often referred to as the basis of business accounting continuity. If and when the liquidation of the entity becomes closer, the financial statements are prepared on the basis of accounting liquidation (Financial Accounting Standard Board, 2014).
A going concern is a functioning business with no liquidation threats for the foreseeable future, usually considered at least within 12 months. This implies to the business the basic declaration of intent to keep running its activities at least for next year, which is a basic assumption to prepare financial statements taking into consideration the conceptual framework of IFRS. Therefore, the statement of business continuity means that the entity has neither the intention nor the need to liquidate or otherwise materially limit its scale of operation.
Business continuity is the simplicity of a business's ability to meet its financial obligations when it matures.
Video Going concern
Definisi
The going concern assumption is universally understood and accepted by accounting professionals; However, it was never officially put into US GAAP. In October 2008, the FASB issued an Exposure Draft called "Going Concern." It discusses the following possible statements for business continuity:
- Review to define and insert existing terms and substantial hesitation into US GAAP
- The time horizon on which management will evaluate the ability of the entity to fulfill its obligations
- The type of information that management should consider in evaluating the ability of an entity to fulfill its obligations
- The effect of subsequent events on management's evaluation of the entity's ability to fulfill its obligations
- Whether to provide guidance in the basis of accounting liquidation.
The definition of current business continuity assumptions can be found in the AICPA Statement of Auditing Standards No. Codification Standards and Auditing Procedures, Section 341, "Auditor's Considerations on the Ability of the Entity to Continue as Survival" (Section AU 341). The concept of 'going concern' assumes that the business will remain long enough for all business assets to be fully utilized. The assets used would mean getting the full benefits of their earning potential. (ie if you recently purchased $ 5,000 worth of equipment that has a productive/useful lifetime for 5 years, then under the business continuity assumption, the accountant will only remove the one year $ 1,000 (1/5) year mark, leaving $ 4,000 to be treated as a fixed asset with future economic value for business).
Maps Going concern
Accounting
This accounting principle assumes that, the company will continue to exist long enough to implement its goals and commitments and will not liquidate in the future. If the company's financial situation is such that the accountant believes the company will not be able to continue, the accountant is required to disclose this judgment.
The principle of business continuity allows the company to suspend some of its prepaid expenses up to the upcoming accounting period. Assumption of business continuity is a fundamental assumption in the preparation of financial statements. Based on the survival assumption, an entity is usually seen as continuing business for the foreseeable future with no intention or necessity of liquidation, discontinue trading or seek protection from creditors in accordance with law or regulation. Thus, unless the assumption of business continuity is not appropriate under the circumstances of an entity, its assets and liabilities are accounted on the basis that the entity will be able to realize its assets, exempt its liabilities, and obtain refinancing (if necessary) in the normal course of business.
An entity is assumed to be continuity in the absence of conflicting important information. An example of such conflicting information is the inability of an entity to fulfill its obligations when they arrive because without the sale of substantial assets or debt restructuring. If this is not so, an entity will essentially acquire the asset for the purpose of closing its operations and reselling the asset to another party.
If an accountant believes that an entity may no longer be an ongoing problem, this raises the issue of whether its assets are impaired, which may require impairment of their carrying amount to their liquidation value, and/or recognition of liability arising from an entity's closing account (which may not appear otherwise). Thus, the value of an entity assumed to be a survival is higher than its breaking value, since business continuity can potentially continue to generate profits.
The concept of business continuity is not clearly defined anywhere in generally accepted accounting principles, and is therefore subject to a large number of interpretations as to when an entity should report it. However, the generally accepted auditing standards (GAAS) do instruct the auditor on the consideration of the entity's ability to continue as a survival.
The auditor evaluates the ability of the entity to continue as a continuation for a period not less than one year after the date of its audited financial statements (longer periods may be considered if the auditor believes that the extended period becomes relevant). The auditor considers these to be a negative trend in operating outcomes, nonperforming loans, the refusal of trade credit from a supplier of uneconomical long-term commitments, and legal process in deciding whether there is substantial doubt about the entity's ability to continue as a business continuity. If so, the auditor should draw attention to the uncertainty about the ability of the entity to proceed as survival, in their auditor's report. On the other hand, the use of an improper business continuity assumption by an entity may cause the auditor to issue a negative opinion on the financial statements. It provides a framework to assist directors, audit committees and finance teams in determining whether it is appropriate to adopt a viability basis for preparing financial statements and in making balanced, proportionate and clear disclosures. Separate standards and guidelines have been issued by the Auditing Practice Board to discuss the auditor's work in relation to business continuity.
Assumption
Under the assumption of business continuity, an entity is seen as sustainable in business for the foreseeable future. General purpose financial statements are prepared on the basis of business continuity, unless management intends to liquidate the entity or discontinue operations, or have no realistic alternative but to do so. Special purpose financial statements may or may not be prepared in accordance with the relevant sustainability reporting framework (eg, the business continuity basis is irrelevant for some financial statements prepared on the basis of tax in certain jurisdictions). When the use of the business continuity assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and release its liabilities in the ordinary course of business.
Audit
The continuation of an entity as business continuity is assumed in financial reporting in the absence of conflicting significant information. Typically, information that is significantly contrary to the assumption of business continuity relates to the inability of the entity to continue to fulfill its obligations when they become matured without substantial disposition of assets outside the ordinary course of business, debt restructuring, external forced revision of its operations, or the like. action.
Responsibility
The auditor has the responsibility to evaluate whether there is substantial doubt about the ability of the entity to continue as a continuity for a reasonable period of time, not exceeding one year after the date of the audited financial statements (hereinafter referred to as the reasonable period of time). The auditor's evaluation is based on his knowledge of the relevant conditions and events that exist on or have occurred before the date of the auditor's report. Information on such conditions or events is derived from the implementation of planned audit procedures and performed to achieve audit objectives related to management statements contained in the audited financial statements, as described in Auditing Standard Nos. 15, Audit Proof.
The auditor should evaluate whether there is substantial doubt about the ability of the entity to proceed as a viable for a reasonable period of time in the following ways:
The auditor considers whether the results of the procedure are carried out in the planning, collection of evidence relating to various audit objectives, and completes the audit identifying the conditions and events which, when considered in the aggregate, indicates there is substantial doubt about the entity's ability to continue as a viable for a reasonable period of time. It may be necessary to obtain additional information about such conditions and events, as well as appropriate evidence to support information that mitigates auditor doubt.
If the auditor believes there is substantial doubt about the ability of the entity to proceed as a continuity for a reasonable period of time, it must obtain information about the management plan intended to mitigate the effects of the condition or event, and assess the likelihood that the plan can be effectively implemented.
After the auditor evaluates the management plan, he concludes whether he has substantial doubts about the ability of the entity to continue as a continuity for a reasonable period of time. If the auditor concludes there is substantial doubt, he should consider the adequacy of disclosure of the possibility of an entity's inability to proceed as a continuity for a reasonable period of time, and including an explanatory paragraph (following an opinion paragraph) in its audit report to reflect its conclusions. If the auditor concludes that substantial doubt exists, he should consider the need for disclosure.
The auditor is not responsible for predicting future conditions or events. The fact that an entity may cease to exist as a business after receiving a report from an auditor that does not refer to substantial doubt, even within one year after the date of the financial statements, does not, by itself, indicate inadequate performance by the auditor. Thus, the absence of a reference to substantial doubt in the auditor's report should not be viewed as providing an assurance of the entity's ability to continue as a business continuity.
Procedures
It is not necessary to design audit procedures solely to identify conditions and events which, when considered in the aggregate, indicate that there is substantial doubt about the ability of the entity to proceed as a continuity for a reasonable period of time. The results of audit procedures designed and conducted to achieve other audit objectives should be sufficient for that purpose. The following is an example of a procedure that can identify such conditions and events:
- Analytical procedure
- Review the next event
- Reviews compliance with terms of debt and lending agreements
- Read minutes of meetings of shareholders, boards of directors, and important committee of the board
- Questions from entity lawyers regarding litigation, claims, and ratings
- Confirm with related parties and third parties about setting details to provide or maintain financial support
Terms and conditions
In carrying out the audit procedures as presented in paragraph.05, the auditor may identify information about a particular condition or event which, when considered in aggregate, indicates that there is substantial doubt about the ability of the entity to proceed as a continuity for a reasonable period of time. The importance of such conditions and events will depend on the circumstances, and some may have significance only when seen together with others. The following are examples of such conditions and events:
Negative trends - for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, key adverse financial ratios
Another indication of the possibility of financial difficulties - for example, a default on a loan or similar agreement, arrearages in dividends, rejection of the usual trade credit from the supplier, debt restructuring, noncompliance with mandatory capital requirements, need to seek new sources or methods of financing or to dispose of substantial assets
Internal issues - for example, work stoppages or other work difficulties, substantial dependence on a particular project's success, uneconomic long-term commitment, need to revise operations significantly
External problems that have occurred - for example, legal proceedings, legislation, or similar matters that may jeopardize the entity's ability to operate; loss of key franchise, license or patent; loss of major customers or suppliers; uninsured or underinsured calamities such as drought, earthquakes, or floods.
Management plan
If, after considering the conditions and events identified in the aggregate, the auditor believes there is substantial doubt about the ability of the entity to proceed as a continuity for a reasonable period of time, it should consider management plans to deal with adverse effects. conditions and events. The auditor should obtain information about the plan and consider whether the possibility of adverse effects will be reduced for a reasonable period of time and that the plan can be effectively implemented. Auditor considerations related to the management plan may include the following:
Plans to dispose of assets
- Restrictions on removal of assets, such as agreements that restrict such transactions in loans or similar agreements or encumbrances to assets
- Clearly valuable assets that management plans to sell
- Possible direct or indirect effects of asset disposal
Planning to borrow money or restructure debt
- Availability of debt financing, including existing or committed credit arrangements, such as credit lines or arrangements for factoring or sale-leaseback assets
- Existing or committed arrangements to restructure or reduce debt or to guarantee loans to entities
- Possible effects on the management loan plan from existing restrictions on additional loans or the adequacy of the available collateral
Plans to reduce or delay spending
- The real feasibility of a plan to reduce overhead or administration expenditure, to delay maintenance or research and development projects, or to rent rather than purchase assets
- Possible direct or indirect effects of reduced or delayed spending
Plans to increase ownership equity
- The real feasibility of a plan to increase ownership equity, including existing arrangements or commitments to increase additional capital
- Existing or committed arrangements to reduce the current dividend requirement or to expedite the distribution of money from affiliates or other investors
When evaluating a management plan, the auditor should identify the elements that are critical to addressing the adverse impacts of conditions and events and must plan and conduct audit procedures to obtain evidence about them. For example, the auditor should consider the adequacy of support regarding the ability to obtain additional financing or asset disposal plans.
When prospective financial information is critical to the management plan, the auditor should ask management to provide such information and should consider the adequacy of support for the significant assumptions underlying that information. The auditor should pay particular attention to the assumptions...
- Material for prospective financial information.
- Primarily sensitive or vulnerable to change.
- Not consistent with historical trends.
The auditor's consideration should be based on knowledge of the entity, its business, and its management and should include (a) reading prospective financial information and underlying assumptions and (b) comparing prospective financial information in the previous period with actual results and comparing them. prospective information for the current period with results achieved to date. If the auditor becomes aware of the factors, an effect that is not reflected in the prospective financial information, he should discuss such factors with management and, if necessary, request revision of prospective financial information.
Financial statement effects
When, after considering the management plan, the auditor concludes there is substantial doubt about the ability of the entity to proceed as a continuity for a reasonable period of time, the auditor should consider the possible effects on the financial statements and the adequacy of the related disclosures. Some of the information that may be disclosed includes--
- Related conditions and events that give rise to a substantial doubt assessment of the entity's ability to continue as a viable for a reasonable period of time.
- Possible effects of these conditions and events.
- Management's evaluation of the significance of these conditions and events and mitigating factors.
- Possible termination of operation.
- Management plan (including relevant prospective financial information). fn 3
- Information on the recovery or classification of the amount of the carrying assets or the amount or classification of liabilities.
When, primarily due to the auditor's consideration of the management plan, he concluded that substantial doubts about the ability of the entity to proceed as a continuity for a reasonable period of time are alleviated; it should consider the need for disclosure of key conditions and events that initially led him to believe there was substantial doubt. Auditor's consideration of disclosure should include the possible impact of the conditions and events, and mitigation factors, including management plans.
Effects on auditor's report
If, after considering the identified conditions and events and management plans, the auditor concludes that substantial doubt about the entity's ability to continue business for a reasonable period of time remains, the audit report should include an explanatory paragraph (following an opinion paragraph) to reflect that conclusion. fn 4 (?) The auditor's conclusion about an entity's ability to continue as a business continuity must be expressed through the use of the phrase "substantial doubt about the ability (entity) to continue as a continuity" [or similar words covering terms of substantial doubt and survival] illustrated in paragraph.13. [As amended, effective for reports issued after December 31, 1990, pursuant to the Statement of Auditing Standards. 64.]
The following example of an explanatory paragraph (following an opinion paragraph) in the auditor's report illustrates the uncertainty about the entity's ability to continue as a continuity for a reasonable period of time.
The accompanying financial statements are prepared on the assumption that the Company will continue its operations on an ongoing basis. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency which raises substantial doubt about its ability to continue as a business continuity. The management plan in relation to these matters is also described in Note X. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.
[As amended, effective for reports issued after December 31, 1990, pursuant to the Statement of Auditing Standards. 64.]
If the auditor concludes that disclosure of the entity with respect to the ability of the entity to proceed as a continuity for a reasonable period of time is inadequate, departure from generally accepted accounting principles exists. This may result in qualifications (except for) or adverse opinions. Reporting guidelines for such situations are provided in section 508, Report on the Audited Financial Statements.
Substantial doubt about the ability of an entity to continue as a viable for a reasonable period of time arising in the current period does not imply that the basis for such doubt exists in the preceding period and, therefore, shall not affect the auditor's report on the previous period's financial statements presented comparatively. When the financial statements of one or more previous periods are presented comparatively with the current period's financial statements, the reporting guidance is provided in section 508.
If the substantial doubt about the ability of the entity to continue as a business continuity for a reasonable period of time is on the date of the previous period's financial statements presented on a comparison basis, and any doubt that has been removed in the current period, the explanatory paragraph is included in the auditor's report (following the opinion paragraph) in the previous period financial statements should not be repeated.
Exceptions
Since the issue of going-concern opinion is feared to be self-fulfilling prophecy, the auditor may be reluctant to issue it. Will-concern Opinions can degrade the trust of shareholders and creditors in the company; rating agencies may lower the debt rating, leading to inability to acquire new capital and increase the cost of existing capital. In 1978, the AICPA established an independent commission (Commission Cohen) which issued a report expressing these sentiments:
Creditors often regard the subject of qualification as a separate reason for not lending, reason in addition to circumstances creating the uncertainty that leads to qualification. This often puts the auditor in a position, basically, deciding whether a company can get the funds it needs to continue operating. Thus, auditor qualifications tend to be self-fulfilling prophecies. The uncertain expression of auditors about the company's ability to continue can contribute to making it a certainty.
Fear is that a going concern opinion can accelerate the destruction of an already troubled company, reduce the willingness of a loan officer to provide credit lines to a troubled company, or increase the spread point that will be imposed if the company is given a loan. The auditor is placed in the center of a moral and ethical dilemma: whether to issue a going-concern opinion and risk of increasing their clients' financial difficulties, or not issuing a going-concern opinion and risk not informing interested parties of possible corporate failures. The hope is to issue a going concern opinion to encourage faster rescue activities.
Another more disturbing reason that auditors may fail to issue a going concern opinion has been alluded to by major media in the business failures of WorldCom and Enron: lack of auditor independence. Management determines the employment and remuneration of the auditor. The threat of receiving a going concern modification can send management to another auditor, in a phenomenon called "shopping opinion." In addition, in the extreme case of self-fulfilled prophecy, if the client is bankrupt, the auditor loses future audit fees. Fear of losing these future costs may impair the auditor's ability to provide unbiased opinions on the client's financial statements.
The Private Securities Litigation Reform Act of 1995 made it much more difficult for the plaintiff to bring a lawsuit against the company's auditor. While the act was codified as a legal reporting requirement of SAS 59, it also made it more difficult for plaintiffs' lawyers to successfully pursue class action suits against auditors. Further, in cases where the auditor does not alter their audit opinion pursuant to SAS 59, the damage award is limited to the proportional liability. When comparing the potential cost of issuing a going-concern opinion (speeding up the client's death, the loss of audit fees) to the cost of not issuing a going concern (litigation) opinion, the result of that action is essentially to tip the scales. support does not issue a going concern opinion. Since the action was passed, high-profile litigation cited the auditor's failure to issue a going-concern opinion, such as a class action lawsuit by Kmart shareholders against PricewaterhouseCoopers, and Adelphia against Deloitte & Touche, has been drastically reduced.
The most critical reason that the auditor may fail to issue a going-concern opinion, however, can be a fundamental misunderstanding of the assumption itself.
Use in risk management
If a public or private company reports that its auditor has doubts about its ability to continue as a business continuity, investors may consider it a sign of increased risk, although the emphasis of the material paragraph in the audit report does not necessarily indicate that the company is on the verge of bankruptcy. Nevertheless, some fund managers may be required to sell stocks to maintain an appropriate level of risk in their portfolio. Negative judgments may also result in breaches of bank loan agreements or leading debt rating firms to lower the company's debt rating, incurring the cost of increasing existing debt and/or preventing the company from obtaining additional debt financing. Because of that response to the concerns expressed by the auditors, in the 1970s, the American Institute of Certified Public Accountants' Cohen commission concluded that the uncertainty expression of auditors about the ability of an entity to proceed as a going concern "tends to be self-fulfilling prophecy. the company's ability to continue can contribute to making its failure a certainty. "Businesses must also communicate with business advisors as well as their auditors in times of adversity. Communication can allow advisors and auditors to help when needed. They can help review their internal risk management business along with other internal controls.
See also
- [Source 2012 PCAOB Survey] If it is concluded by an independent auditor, or management or both that the company may not be running, what disclosures should be given to investors?
- A fairly detailed discussion of the company's ability to generate sufficient cash to support its operations for at least twelve months from the date of the financial statements. The expected action programs that bear the company's financial flexibility such as:
- [Note: Look for this discussion in three locations: Auditor's report, Discussion and management analysis and Notes to the financial statements. Concert views will be seen in the future, therefore it is strongly recommended that 10-K and 10-Q reports be searched on the terms "Risk Factors" for important forward risk disclosure. For background abbreviated see: Reg S-K Item 503 and 10-K Risk Factors]
- New loan. (See topics like Financial distress, Distressed loans, Spiral financing Death, Factoring, Debt restructuring, Debt, Loans, Money markets)
- Mobilize new capital. (See Capital Markets, Financial Capital)
- Liquidation of assets. (See Liquidation Value, Fire Sales)
- Reduce costs. (See Cost reduction)
- Reduce dividends. (View Dividend)
- Reduce the level of service or product. (See Restructuring, Termination)
- File a bankruptcy
- A fairly detailed discussion of the company's ability to generate sufficient cash to support its operations for at least twelve months from the date of the financial statements. The expected action programs that bear the company's financial flexibility such as:
- The going concern status is usually closely related to, and associated with, issuers who lower the credit rating (s)
- Company credit rating
- Rating agencies and credit Criticism
- The concentration of large corporations issuing opinion concerns has been raised as a systemic risk. See Big Four (audit firm) PwC, Deloitte, Ernst & amp; Young, and KPMG
- The concentration of large corporations issuing credit opinion has also been raised as a systemic risk. See Big Three (credit rating agency) Standard & amp; Poor's, Moody's Investor Service, and Fitch Ratings
- The state of concern will often trigger technical standards . View discussion in Default Type. This could mean unused credit lines and Unsecured debt facilities.
- The status of anxiety will be a self-fulfilling prophecy
References
External links
- What is 'going concern' in Accounting (Peter Baskerville).
- March 2012 PCAOB Investor Group Meeting, see Working Group: Going to Discussion PCAOB Advisory Group Meetings
Source of the article : Wikipedia
0 Comments