By Eric Hines, Mark Giese, Accounting Today
The COVID-19 pandemic has created unprecedented uncertainty, and businesses across all industries have felt, or will likely feel, the related financial strains and pressures. With customers confined to their homes under mandatory orders to shelter in place, and nonessential businesses closed for the foreseeable future, many corporate executives will be pondering their companies’ ability to generate sufficient cash flows to support operations. Maintaining compliance with debt covenants, and the related impact on companies’ ability to continue under the going concern assumption, will be of particular interest for highly leveraged businesses.
ASC 205-40, “Presentation of Financial Statements — Going Concern,” requires management to assess their companies’ ability to continue to operate within one year after the financial statements are issued or available to be issued. Where there is no substantial doubt about an entity’s ability to continue its operations, financial statements are prepared using the going concern assumption (as opposed to liquidation-basis accounting, which assumes that liquidation is imminent). Substantial doubt about an entity’s ability to continue as a going concern can arise due to factors such as negative financial trends, internal factors, including work stoppages or needing to significantly modify operations, or external matters such as loss of key vendors.