Going concern considerations during uncertain times

During ordinary times, most governments don’t think about the possibility of closing their doors, otherwise known as a going concern. However, in these uncertain times, evaluating plans and actions regarding the possibility of becoming a going concern or having to address considerations related to going concern is more relevant.

The accounting definition of a going concern is “a business that is assumed will meet its financial obligations when they fall due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period.”

GASB Statement No. 56, “Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards” (paragraphs 16-19), contains certain indicators that there may be substantial doubt about a government’s ability to continue operating as a going concern. Such indicators include:

• Negative trends – recurring periods of losses (excess expenditures over revenues), working capital deficiencies or adverse key financial ratios
• Other indicators of possible financial difficulties – default on bonds, loans or similar agreements, proximity to debt and tax limitations or the need to seek new sources or methods of financing or to dispose of substantial assets
• Internal matters – work stoppages or other labor difficulties, dependence on a particular program or project or need to significantly revise operations
• External matters – legal proceedings, legislation or other matters that could jeopardize intergovernmental revenues or the fiscal sustainability of key programs

Governments should continue to monitor their business operations, including the availability of funding to meet outstanding debt obligations when and as they are due, revise work processes during physical location closures and keep current on legislative initiatives and mandates that could impact their provision of services and/or availability of funding.

In all cases, but especially during these uncertain times with rapid changes in operations, management should review their business plans and operational needs on a frequent basis. Takeaways should be documented, particularly if they include impacts on a potential going concern. Considerations should include:

• Revenue and collection streams
• Applicability of rate or tax caps
• Availability of financing or additional liquidity
• Recoverability of asset amounts

In situations where there is a going concern risk, the above elements should be included within the notes of the entity’s financial statements and management’s discussion and analysis.

For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.