The “going concern” assumption is important because it underlies generally accepted accounting principles. Financial statements are prepared on the basis that the entity is a “going concern”, meaning that it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.
According to the report, there were 8,664 business bankruptcies in Canada in 1989, accounting for about $2.2 billion in liabilities against assets of only $774 million, representing losses to creditors of more than $1.4 billion. In view of the economic significance of “going concern” disclosures, the lack of professional guidance, and the absence of standards in this area, the purpose of the report is to provide the basis for:
- an accounting standards project to address the financial reporting implications of the “going concern” assumption in the accounting section of the CICA Handbook;
- an auditing standards project to modify CICA Handbook Section 5510, Reservations in the Auditor's Report, regarding auditor review of management's assertion as a “going concern”;
- an audit techniques study to support the professional judgment process.
- defining key terms including “financial distress”, “insolvency” and “bankruptcy”.
- discussing whether any reference should be made to the “going concern” assumption in the notes to the financial statements.
- assessing the financial reporting implications when there is insufficient support for the assumption.
- identifying conditions which may bring into question the continuance of an entity as a “going concern”.
- providing guidance on how doubts as to “going concern” status should be expressed.
- evaluating alternative principles governing the presentation of financial information including historical cost, value realizable in orderly liquidation and discounted value.
- determining the need for auditor review of the support for management's implicit or explicit “going concern” assumption.
- assessing the audit implications and providing guidance for reporting when there is insufficient support or inadequate disclosure in the financial statements.
- considering techniques to support the professional judgment process.
The report responds to recommendations in the 1990 publication Approaches to Dealing with Risk and Uncertainty and the 1988 Report of the Commission to Study the Public's Expectations of Audits, which noted the need to warn the public about the risk of business failure and the auditor's responsibility in that connection.
