10 Apr When You Have Substantial Doubts About Your Non-Profit’s Future
U.S. Generally Accepted Accounting Principles require non-profits to regularly evaluate whether there is ‘substantial doubt’ about their ability to continue as a going concern. This means that the organization will not soon liquidate its assets and cease operations. What does your management team do if it determines substantial doubt?
Your non-profit’s management must perform a going-concern evaluation each time annual or interim financial statements are issued. There are two steps:
- Evaluate whether conditions and events exist that raise substantial doubt about your organization’s ability to continue as a going concern.
- If so, consider whether plans intended to mitigate those conditions or events will alleviate the substantial doubt.
If you decide that there is substantial doubt, you must make certain disclosures in your financial statement footnotes.
Substantial doubt exists when relevant conditions and events indicate that your organization likely will not meet financial obligations that come due within one year after the date financial statements are issued. Relevant factors include:
- Current financial conditions
- Obligations due or anticipated within one year
- Funds needed to maintain operations considering current financial condition, obligations, and other expected cash flows
- Other conditions and events that may adversely affect your organization
Adverse conditions and events that raise substantial doubt might include negative cash flows, a loan default, denial of credit by suppliers, or litigation. To mitigate such conditions, you might, for instance, decide to dispose of an asset, borrow money, or reduce or delay expenditures.
But, you can consider the mitigating effect only if it is likely that your plans will be effectively implemented. For example, do you have the necessary resources to carry out your plan? You also need to weigh the likelihood that your plan will be as effective as the situation requires. Can you actually alleviate the negative conditions within one year?
Do not go it alone
Disclosures are required when substantial doubt exists, regardless of whether your plans will lessen the doubt. And if you are doubting your non-profit’s future, it is essential that you work with a financial advisor. We can help you evaluate your organization’s condition and identify next steps. We also can help ensure that your financial statements include all required information about your status.