Are you certain that your organization is financially stable enough to be operating in a year? U.S. Generally Accepted Accounting Principles (GAAP) give your nonprofit a reason to evaluate that proposition.
Evaluating your organization
Accounting Standards Codification (ASC) 205-40 requires management to perform a going-concern evaluation each time annual or interim financial statements are issued. Management’s responsibilities are in addition to the auditor’s going-concern responsibilities — both parties must conduct evaluations.
The management evaluation comprises two steps. First, your management team must evaluate whether conditions and events exist that raise substantial doubt about your organization’s ability to continue as a going concern. Second, if doubt exists, it must consider whether your plans meant to mitigate those conditions or events will alleviate the doubt. And your plan must be feasible to implement.
If substantial doubt is found about your nonprofit’s ability to survive, management must make certain disclosures in its financial statements’ footnotes. The extent of the disclosures will vary depending on whether management concludes that its plans will allay the doubt.
Gauging financial stability
Substantial doubt exists when relevant conditions and events, considered together, indicate that it’s likely an organization won’t be able to meet its financial obligations. That assessment involves obligations that come due within one year after the date of the financial statements’ issuance.
Relevant factors include your nonprofit’s current financial condition and obligations anticipated within one year. You also should consider the funds needed to maintain operations given your organization’s current financial condition, liabilities and other expected cash outlays within one year. Also weigh in conditions and events that may adversely affect your ability to meet anticipated expenses over the next year.
Adverse conditions and events that raise substantial doubt include negative financial trends (for example, negative cash flows from operations) and indications of possible financial difficulties (such as loan default or denial of credit by suppliers). Litigation, legislation or other matters that threaten the nonprofit’s ability to operate also count in the doubt equation.
As part of a plan to lessen the conditions and events that create substantial doubt, you may want to dispose of an asset, borrow money, or reduce or delay expenditures. But, you can consider the mitigating effect only if the plan 1) will lessen the conditions that raised the substantial doubt about the ability to continue as a going concern, and 2) can be effectively implemented. The likelihood of effective implementation is based on the feasibility of this action in light of your nonprofit’s individual circumstances. For example, do you have the necessary resources to carry out the plan?
As for the likelihood of mitigation, consider the expected magnitude and timing of your plan’s mollifying effect. In other words, will the plan alleviate the conditions and events within one year?
Disclosing required information
Disclosures are required when substantial doubt exists, regardless of whether your plans will significantly lessen the doubt. You must disclose information that allows financial statement users to understand the principal conditions and events that raise the doubt. Your disclosure also must include management’s evaluation of their significance in relation to the organization’s ability to meet its obligations.
During the process, don’t neglect to disclose information about any plans to alleviate relevant conditions and events. If you determine that your management’s plans won’t mitigate the conditions or events within the year, include a statement in the footnotes. It must indicate that substantial doubt exists about your ability to continue as a going concern for one year after the date the financial statements are issued.
Once you determine that a substantial doubt exists about your organization’s ability to continue, your disclosure obligation is ongoing. Until the related conditions or events are resolved, you must make these disclosures. And, as the conditions or events change over time, so should your disclosures — to ensure that your financial statement users receive the most current information.
Turn things around
Evaluating your organization’s financial durability may cause some trepidation. But the requirement to assess your nonprofit’s ability to continue as a going concern lays the groundwork for fixing problems.
To learn more about how our firm can serve your nonprofit organization, please contact Dave Wolfenden at (302) 254-8240.