How to Evaluate Going Concern
How to Evaluate Going Concern
Restaurant management routinely determines how a company will be funded for the next year in order to continue as a going concern. Current economic conditions resulted in flat same-store sales in 2017 and fierce competition remains prevalent across the industry. ASU 2014-15, Presentation of Financial Statements–Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, requires management to prepare an assessment of its Company’s presumed ability to continue as a going concern. The evaluation of the presumption should identify relevant conditions and events that, in aggregate, raise substantial doubt about the entity’s ability to continue as a going concern.
When assessing future conditions, both quantitative and qualitative information need to be considered as of the date the financial statements are issued. Such conditions are analyzed for a period of time not exceeding one year subsequent to the report issuance date and should be conducted at every reporting period. Management should look at a variety of factors to assist in evaluating the Company’s sustainability and the ability to manage obligations due within a year. Factors to weigh may include:
- Key industry financial metrics
- Operating results
- Future obligation and liquidity
- Covenant compliance
- Forecasted net cash flows from operations
- Capital expenditure commitments
After completing the analysis and determining there are probable conditions that raise substantial doubt about the entity’s ability to continue as a going concern, management must examine whether there are factors to mitigate those conditions. Management should develop a plan and assess its ability to mitigate those relevant conditions or events that would alleviate the substantial doubt. The mitigating effect of management’s plan is considered only to the extent that it: (1) is probable that the plans will be effectively implemented and (2) is probable that the plans will mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern. Possible mitigating factors to consider include, but are not limited to:
- Capital infusion from new and existing investors
- Modification to debt obligations requirements
- Rent abatements negotiated
- Food cost saving strategies
- Menu engineering
- Negotiating better pricing with vendors
- Menu price increases
- Streamlining of G&A costs
- Closing non-performing stores
If there is substantial doubt about the Company’s ability to continue as a going concern, regardless of whether management’s plans to mitigate those conditions are considered effective, management is required to disclose that fact and the reasons giving rise to such doubt and must include management’s response on remedying the situation. If management concludes that there is substantial doubt about the Company’s ability to continue as a going concern, an emphasis-of-matter paragraph may be included in the independent accountant’s report.
To keep up with the latest thoughts from BDO’s Restaurant practice, please subscribe to the Selections Blog on the Selections homepage here, and following us on Twitter at @BDORestaurant.