In recent weeks, we have seen going-concern disclosures emerging from high-profile companies such as Norwegian Cruise Line, and we have also seen Chapter 11 bankruptcy filings from high-profile clothing retailers such as J. Crew and Neiman Marcus. These disclosures and filings may continue to worsen as the effects of the pandemic continue.
Company going-concern disclosures should not be surprising. Because of the current environment, companies are laser-focused on balancing immediate cash needs with expected cash inflows. These analyses involve assumptions and judgments which, when combined with longer-term analyses required in, for example, goodwill impairment tests, necessitate management applying assumptions and judgments in a very uncertain environment. When management concludes there is a substantial doubt that the company can continue as a going concern, the company is required to disclose this.
Auditors, in evaluating whether the financial statements are presented in conformity with generally accepted accounting principles, will assess management's going-concern evaluation. In addition to considering management's evaluation, auditors are also required to assess whether the company can continue as a going concern using their own judgments and, if applicable, include them in the auditor's report if there is substantial doubt.
Obviously, company disclosures about solvency are extremely important in this environment. Investors should consider what they can glean from these disclosures, not only about asset impairments, including goodwill, but the level of company fixed vs. variable costs. The latter is especially important to assess a company's ability to bridge over the next 18-plus months toward projections of, hopefully, a more normal future.