The economic fallout from the COVID-19 pandemic has been profound. Companies in numerous sectors, including energy, travel and retail, among others, are now under significant stress, and need to make plans to address the issue. Ultimately, their ability to continue as a going concern may be in doubt.
The board’s role when a company is facing significant liquidity issues is incredibly important. There are many decisions that need to be made and plenty of opportunity for others to be critical when leveraging 20/20 hindsight. Understanding the nuances of the financial accounting definition of a going concern is something the board needs to get their arms around. In the near term, the company might narrowly miss the requirement to have to make disclosures that there is substantial doubt about the company’s ability to continue as a going concern. But that narrow miss might also be a sign that the company will be facing a more challenging going concern discussion in a few months, or even a bankruptcy or restructuring down the road should economic conditions continue to worsen.
Making sure directors are getting the best information and are able to look at things from all angles will be key. As directors consider the facts and circumstances facing a company with challenging liquidity issues, they will want to consider some of the following questions: