Not-for-profit financial reporting: management’s going concern analysis – step by step

As a result of the COVID-19 pandemic, many not-for-profit organizations are faced with significant declines in revenues due to program closures and decreased contributions. Not only does this present significant operational challenges for not-for-profit organizations, it presents financial reporting considerations as well.

At each annual and interim reporting period, accounting standards require management to evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern.

What process should a not-for-profit management team follow in this evaluation?

Step 1: Are there conditions or events, considered in the aggregate, that raise substantial doubt about the not-for-profit entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or are available to be issued)?

Substantial doubt exists when it is probable(1) that the not-for-profit entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued.

Management’s evaluation of whether substantial doubt is raised should not take into consideration management’s plans that have not been fully implemented (e.g., plans to borrow money, sell assets, etc., that have not already been completed at the time of management’s evaluation).

What are some considerations for management as they evaluate whether substantial doubt exists under the current environment?

• Management’s evaluation is required to include all conditions or events that are “known or reasonably knowable” at the date the financial statements are issued or available to be issued.
• As COVID-19-related conditions and events are evolving rapidly, management needs to monitor these conditions and events up to the date the financial statements are issued or available to be issued.
• This may require management to refresh evaluations that may have taken place weeks ago.

Management should prepare an analysis showing their current liquidity and cash flow projection for the upcoming year to assist in this evaluation.

How should a not-for-profit’s cash flow forecast be factored into this section of their going concern assessments?