Note X – Going Concern

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Note X – Going Concern

Use in Circumstances Where Substantial Doubt is Alleviated by Management’s Plans:

(Describe conditions or events giving rise to a substantial doubt about the government’s ability to continue as a going concern for a reasonable period of time) [1]

(Describe management’s plan) [2] These planned actions are expected to enable the government to continue operating and meeting its obligations as they come due.

Use in Circumstances Where Substantial Doubt is Not Alleviated by Management’s Plans:

The financial statements have been prepared on a going concern basis, which assumes the (city/county/district) will be able to realize its assets and settle its liabilities in the normal course of business for the foreseeable future. (Describe conditions or events giving rise to a substantial doubt about the government’s ability to continue as a going concern for a reasonable period of time) [1]

These conditions raise substantial doubt about the (city/county/district)’s ability to continue operating as it has in the past. (Describe management’s plan) [2] The ability to continue as a going concern is dependent upon (describe conditions needed, such as a favorable outcome to litigation, ability to secure permanent financing, continuing to receive outside assistance with deficits, reduction of certain expenditures or increase in certain revenues, success of management’s plans as described above, etc.)

Instructions to preparer:

Management’s evaluation of the government’s ability to continue as a going concern for a reasonable period of time involves making a judgement, at a particular point in time, about inherently uncertain future outcomes of conditions or events. The following factors are relevant to that judgment:

  • The degree of uncertainty associated with the outcome of a condition or event increases significantly the further into the future a condition or event or the outcome occurs. For that reason, most financial reporting frameworks require an explicit management evaluation specific to the period, for which management is required to take into account all available information.

  • The size and complexity of the government, the nature and condition of its business, and the degree to which it is affected by external factors affect the judgment regarding the outcome of the condition or events.

  • Any judgment about the future is based on conditions or events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued, when applicable). Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made.

[1] If conditions or events raise a substantial doubt about a government’s ability to continue as a going concern for a reasonable period of time (fifteen months beyond the date of the financial statements), the notes to the financial statements should include disclosure of the following, as appropriate:

  • Relevant conditions and events giving rise to the assessment of substantial doubt

  • The possible effects of such conditions and events , including possible discontinuance or severe reduction of operations, if applicable

  • Government officials’ evaluation of the significance of those conditions and events and any mitigating factors,

  • Government officials’ plans, including relevant prospective financial information or subsequent events

  • Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities that may be affected by the events or conditions.

[2] The following list includes examples of plans that management may implement to mitigate conditions or events and specific considerations regarding information to disclose about those plans (examples are not all inclusive). For all plans, consider disclosure of estimated time frame for action, whether the planned action has been approved by the governing body or is just being considered, and possible direct or indirect effects of disposal on operations or levels of service.

  • Discontinuing or outsourcing certain activities or operations. Consider disclosing estimated transition costs and future cost savings (if known) and any restrictions, whether services are expected to be assumed by other governments, and any encumbrances or uncertainties related to the discontinuance, such as the need to negotiate with service providers or contractors.

  • Selling an asset. Consider disclosing any conditions, restrictions, encumbrances or uncertainties related to the sale or marketability of the asset.

  • Borrowing money or restructuring debt. Consider disclosing availability and terms of planned financing and any expected need for collateral or third-party guarantees.

  • Reducing or delaying expenditures. Consider disclosing whether reductions are planned to be temporary or permanent and any restrictions, encumbrances or uncertainties related to the reduction, such as the need to negotiate with unions, vendors or other parties.

  • Raising revenues. Consider disclosing any conditions or uncertainties such as the outcome of a vote or grant application.