The “going concern assumption” is a key consideration for financial reporting. If an entity is deemed a going concern, many assets may be valued at their cost, as opposed to current (or liquidation) values. If the entity is found to be at risk of liquidation, however, that risk should be disclosed, and the entity may have to recast its financial statements on a liquidation basis.
The going concern assumption matters for businesses, as well as governments.
The Governmental Accounting Standards Board (GASB) last updated its guidance on going concern considerations for state and local governments in March 2009, in GASB Statement No. 56. The timing of the statement is certainly interesting, amidst the worst economic and financial crisis in the United States since the Great Depression. That statement affirmed that financial statement preparers have a duty to evaluate whether the government has the ability to remain a going concern for 12 months after the date of the financial statements, even if the financials were prepared a few months after the date for the financial statements.
Among the criteria that could undermine an assumption that the entity was a going concern, GASB Statement No. 56 included “legal proceedings, legislation, or similar matters that might jeopardize intergovernmental revenues and the fiscal sustainability of key governmental programs.” In turn, were entities to deem themselves at risk of liquidation, the statement directed the financial statements to include footnote disclosures about the factors responsible, along with discussion in the “Management Discussion and Analysis” section of the annual financial report.
In 2015, the GASB embarked on a new research project on going concern disclosures, which may or may not lead to new formal guidance and/or standards for state and local government financial reporting. This new project followed on the heels of a GASB grant funding statistical research into indicators of government financial stress. Announcing the project, GASB raised the question “Are the current going concern indicators presented in note disclosure guidance appropriate for state and local governments, in light of the fact that, even under severe financial stress, few governments cease to operate even when encountering such indicators?”
When the end is near, however, it can be hard for organizations to admit it. Their leaders may try to inspire confidence in themselves, forestalling a collapse in customer and supplier confidence until it is too late. Consider American International Group (AIG), the huge insurance company that went belly-up in the 2008-2009 financial crisis. AIG was reporting tens of billions of dollars in shareholder equity for several quarters after the market had already deemed the common shares worthless.
AIG proved to actually be a going concern, of some form, anyway, given the government bailouts in the financial crisis.
But what about governments? Unlike businesses, they have the power to tax, don’t they? Do governments ever go out of business?
Every July 4th, we celebrate a rare but relevant example.
How about Illinois state and local governments? Are they going concerns?
Well, in plain English, yes, the State of Illinois and the City of Chicago are going concerns. They are still going, and their financial condition are sources of concern.
But how long will they keep going?
It depends – including, for one thing, on a new initiative called New Illinois. New Illinois states:
Our vision is of a State free from a tyrannical form of government, where residents will be able to experience a government representing their constitutional rights, as guaranteed in Article IV, Section 4 of the U.S. Constitution. … Illinois is a failed state and is not fulfilling its responsibilities to its citizens. We believe the situation is beyond reformation and will only be remedied through an Article IV, Section 3 state split provided for in the U.S. Constitution.
New Illinois seeks to educate citizens about their constitutional right to create a new state, splitting “Old Illinois” in two pieces, one of which would not include the City of Chicago.
This probably isn’t something that would happen in the next 12 months, but it is worth watching.