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 (1) management has identified conditions or events that raise substantial doubt that has not been alleviated by management’s plans and (2) an explanatory paragraph has been added to the auditor’s report, a valuation allowance would often 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 some circumstances, such as when the immediate cause of the going-concern uncertainty may not be directly related to the entity’s as-adjusted earnings history (e.g., a financing issue caused by a nonrecurring event or other short-term liquidity hurdle), a full valuation allowance may not be required. Entities must apply significant judgement in these situations and are encouraged to consult with their accounting advisers.

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.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.