Although the economy has bounced back from the uncertainties of the COVID-19 years, it can still be rough going for nonprofit organizations. According to Independent Sector, 2022 saw a 10% drop in donors. If your organization is struggling, you may need to report this in your financial statements. A going-concern evaluation will lay the groundwork for fixing problems.
Going-Concern Evaluation
Accounting Standards Codification (ASC) 205-40 requires management to perform a going-concern evaluation when the organization issues annual or interim financial statements. Management’s responsibilities are in addition to the auditor’s required going-concern responsibilities.
The management evaluation comprises two steps. First, your team must determine whether conditions and events exist that raise substantial doubt about your organization’s ability to continue as a going concern. Second, if doubt exists, the team must consider whether your plans meant to mitigate those conditions or events will alleviate the doubt and are feasible to implement.
If management discovers substantial doubt about your nonprofit’s ability to survive, it must make certain disclosures in your financial statements’ footnotes. Disclosures will vary depending on whether management concludes that its plans will allay the doubt.
Substantial doubt factors
Substantial doubt exists when relevant conditions and events indicate that it’s likely an organization won’t be able to meet its financial obligations. That assessment covers obligations that come due within one year from the date the financial statements are available to be issued.
Relevant factors include your nonprofit’s financial condition at the time of the audit and obligations anticipated within one year from the evaluation date. You also should consider the funds needed to maintain operations during that time and payments required for liabilities and other expected cash outlays. Further, weigh known conditions and events that may adversely affect your ability to meet cash needs.
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 your nonprofit’s ability to operate also count.
Likelihood of mitigation
To help lessen the conditions and events that create substantial doubt, you may want to dispose of an asset, borrow money, obtain other sources of revenue, or reduce or delay expenditures. But, you can consider the mitigating effect only if your plan:
- Will lessen the conditions that raised the substantial doubt about the ability to continue as a going concern, and
- Can be effectively implemented.
The likelihood of effective implementation generally depends on your nonprofit’s individual circumstances. For example, do you have the necessary resources to carry out your plan? As for the likelihood of mitigation, consider the expected magnitude and timing of your plan’s mollifying effect. In other words, is it probable that your plan will alleviate conditions and events within one year?
Information to disclose
Disclosures are required when substantial doubt exists, regardless of whether your plans will significantly lessen the uncertainty. You must disclose information that allows financial statement users to understand the principal conditions and events that raise the doubt. Include management’s evaluation of their significance in relation to your organization’s ability to meet its obligations.
Be sure to reveal information about any plans to alleviate relevant conditions and events. If you determine your management’s plans won’t mitigate the conditions or events within the year, include a statement in the footnotes. The statement must indicate that substantial doubt exists about your ability to continue as a going concern for one year after the date your financial statements are issued.
Once you determine a substantial doubt exists about your organization’s ability to continue, your disclosure obligation is considered 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. The bottom line: Ensure that your financial statement users receive the most current information.
Keep your staff informed about economic uncertainty
Staffers are as likely to be concerned about the future of your nonprofit as you are. This includes worries about their own employment and what might happen to the people you serve. Thus, frequent and honest communication about the health of your organization is essential.
It’s not enough to hold one meeting about your nonprofit’s finances and then go back to business as usual. Keep staff informed with frequent updates. In person generally is best for big news, but you might also use videoconferencing, e-mail, intranet posts and phone messages, or communicate via department managers.
Going-Concern Evaluations lay groundwork for change
No organization likes to believe it isn’t financially stable enough to be operating in a year. But taking the time to review the numbers is the best way to move forward. Make sure you’re regularly evaluating financials for going-concern issues, and if you have any questions about going-concern evaluation, contact us. Our audit team would be happy to help.
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