Whatever else it is, going concern is based on judgement
As you can see, going concern is complicated and depends on judgement: judgement about the future, about whether the company can meet its obligations. And this judgement centres on doubt.
To stay consistent with their prior behaviour, the two accounting bodies use different adjectives to describe the doubt in question. In IFRS it is ‘significant doubt.’ Under GAAP it is ‘substantial doubt.’
‘Substantial doubt about the company’s ability to continue as a going concern’. (GAAP)
‘Significant doubt about the company’s ability to continue as a going concern’. (IFRS)
Now what on earth is the difference between significant and substantial? And does it matter in this context? It must matter to the two accounting bodies otherwise they would have used the same word.
Substantial is greater than significant. The Oxford English Dictionary seems to agree with me but in a hesitant sort of way. In one of their definitions of substantial they state ‘of real significance’. [1] Not significant on its own but of real significance. I am not sure what ‘of unreal significance’ would look like, but let’s not get into unnecessary semantics. On the other hand in one of their definitions of significant they use the word substantial, [1] so perhaps they are interchangeable after all. But still ‘doubt of real significance’ remains stronger than significant doubt.
As usual the two accounting bodies use the same expression: doubt about going concern, but give them slightly different meanings and different ways to apply them.
Confusion and complication again. No doubt on purpose.
But it doesn’t end there.
Some accountants have tried to explain in more detail what doubt in this context really is. Deloitte consider that doubt exists when the event is ‘probable’, borrowed from the FASB definition. [2] The event here is whether the company can meet its expectations. And then they go on to define probable as ‘likely to occur’.
This is a classical way accountants define difficult concepts. They explain and define concepts with explanatory words going down several levels until they run out of where to go. With going concern, there are four levels:
- Going concern
- Not a going concern when significant doubt
- Significant doubt means probable
- Probable means likely to occur
In the end it depends on the combined judgement of the directors of the company preparing the financial statements, who then have to convince the auditors. To me, when an event is likely to occur what is the level of doubt – not much!
The definition of “substantial doubt about an entity’s ability to continue as a going concern” in the Accounting Standards Codification (ASC) master glossary notes that such doubt:
“exists when conditions and events, considered in the aggregate, indicate that it is probable (i.e., the future event or events are likely to occur) that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.”
So the judgement comes down to whether going concern is no longer possible because an event is likely to occur in the future. To me that is not really equivalent to significant doubt or even substantial doubt.
But then nobody seems to care anyway.
[1] Oxford English Dictionary: Substantial: 4. Firmly or solidly established; of solid worth or value; of real significance, weighty; reliable; important, worthwhile.
Significant: 4b. In weakened sense: noticeable, substantial, considerable, large.