5.6 Going-Concern Opinion as Negative Evidence
PCAOB AS 2415 and AICPA AU-C Section 570 require an explanatory paragraph in the
auditor’s report when the auditor concludes that “substantial doubt about the entity’s
ability to continue as a going concern for a reasonable period of time remains.” In
addition, ASC 205-40 requires an entity’s management to evaluate whether conditions or
events raise substantial doubt about the entity’s ability to continue as a going concern
and, if so, “whether its plans that are intended to mitigate those [relevant] conditions
and events, when implemented, will alleviate substantial doubt.” In circumstances in
which management has identified conditions or events that raise substantial doubt that
has not been alleviated by its plans and an explanatory paragraph that has been added to
the auditor’s report, a valuation allowance would generally be recorded for all DTAs
whose realization is not assured by either offsetting existing taxable temporary
differences or carryback to open tax years. However, in very limited circumstances, the
immediate cause of the going-concern uncertainty may not be directly related to the
entity’s operations, in which case a full valuation allowance may not be required.
The fact that (1) management has not identified conditions or events that raise
substantial doubt, (2) management has identified conditions or events that raise
substantial doubt but has determined its plans alleviate the substantial doubt, or (3) a
going-concern explanatory paragraph is not included in the auditor’s report does not
automatically constitute positive evidence about the realization of DTAs. Similarly,
when an entity concludes that it must record a valuation allowance for all or part of
its DTAs, a going-concern problem may not necessarily exist. For example, an entity that
generates sufficient positive cash flows to service its debt and support the book value
of its assets (i.e., the entity’s assets are not impaired), but that is experiencing
financial reporting losses (i.e., recent cumulative losses), would have negative
evidence about the realization of DTAs. In this case, the positive evidence may not be
sufficient to overcome the negative evidence; thus, the entity would provide a valuation
allowance for all or part of its DTAs. However, the auditor may conclude, on the basis
of positive cash flows and other factors, that it is not necessary to provide a
going-concern reference in the auditor’s report, and management may likewise conclude
that conditions or events do not raise substantial doubt about the entity’s ability to
continue as a going concern.