Do It For The Kids (Properly Assess Going Concern under ASC 205, That Is!)
Do It For The Kids (Properly Assess Going Concern under ASC 205, That Is!)

Do It For The Kids (Properly Assess Going Concern under ASC 205, That Is!)

Can you hear the cries of the children? On March 15, 2018 Toys-R-Us announced it was liquidating its inventory and would close or sell all of its stores in the U.S. and Puerto Rico. This comes on the heels of a disappointing Christmas season for the toy retailer and after it filed for voluntary Chapter 11 bankruptcy protection in September 2017. I’m sorry, viewing pictures of toys on Amazon.com just isn’t the same as cruising the aisle at Toys-R-Us! This got me wondering, “When did Toys-R-Us disclose that there was substantial doubt about its ability to continue as a going concern as required by ASC 205-40 Presentation of Financial Statements – Going Concern?”

In a previous post, we discussed the new requirements related to going concern as a result of the issuance of ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Specifically, how the ASU requires that management, not the auditors, evaluate whether there are conditions that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 was effective for annual periods ended after December 15, 2016 and for annual and interim periods thereafter.

In that post, we claimed that the new guidance was working. Well, I decided to do some research to see if we needed to revise our conclusion.

Toys-R-Us filed for voluntary Chapter 11 bankruptcy protection on September 18, 2017. The guidance within ASC 205-40 requires companies to look out for one year after the financial statements were issued. So, when did Toys-R-Us disclose that there was “substantial doubt?”

Form 10-K for fiscal year ended January 28, 2017 (filed April 12, 2017)

With only 5 months until they filed for Chapter 11 bankruptcy protection, Toys-R-Us filed a Form 10-K that didn’t report (or disclose) a going concern problem. Here’s the financial highlights:

  • Net loss of $36 million (which was “better” than the net losses experienced in each of the preceding two years)
  • Interest expense of $457 million (operating earnings were only $460 million)
  • $1.29 billion total stockholders’ deficit
  • Breakeven operating cash flows, with a net decrease in total cash and cash equivalents of $114 million

Form 10-Q for quarterly period ended April 29, 2017 (filed June 13, 2017)

With only 3 months until they filed for Chapter 11 bankruptcy protection, Toys-R-Us filed a Form 10-Q that didn’t report (or disclose) a going concern problem. Here’s the financial highlights:

  • Year-to-date net loss of $164 million, with an operating loss of $12 million
  • Interest expense (year-to-date) of $107 million
  • $1.32 billion total stockholders’ deficit
  • Negative operating cash flows of $657 million, with a net decrease in total cash and cash equivalents of $265 million

Form 10-Q for quarterly period ended July 29, 2017 (filed September 27, 2017)

The gig is up. Here’s the financial highlights:

  • Year-to-date net loss of $330 million, with an operating loss of $12 million
  • Interest expense (year-to-date) of $229 million
  • $1.43 billion total stockholders’ deficit
  • Negative operating cash flows of $580 million, with a net decrease in total cash and cash equivalents of $258 million

Notice how they filed late! Why? Well, remember what happened on September 18, 2017? They filed for Chapter 11 bankruptcy protection, which was disclosed as a subsequent event in the Form 10-Q.

According to ASC 205-40, substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued (or available to be issued). Toys-R-Us determined this existed when they actually filed for Chapter 11 bankruptcy protection. Gee thanks! I don’t think disclosing something after it has already happened in what the FASB had in mind!

And Toys-R-Us certainly isn’t alone as pressure mounts on brick-and-mortar retail stores. According to CNN Money, more than 300 retailers filed for Chapter 11 bankruptcy protection in 2017 and more are expected to file in 2018. In fact, there are several lists out there, like this article by the Motley Fool, predicting the next retailer to fail. And the retailer topping the charts as “next to fail” is Sears Holdings.

Sears Holdings Corporation filed its Form 10-K for the fiscal year ended February 3, 2018 on March 23, 2018. Here are the highlights:

  • Net loss of $383 million (which was “better” than the net losses experienced in each of the preceding two years)
  • Interest expense of $539 million (and an operating loss of $430 million)
  • $3.72 billion total stockholders’ deficit
  • Negative operating cash flows of $1.8 billion, with a net increase in total cash and cash equivalents of $50 million

Did they disclose a going concern issue? Nope! Here we go again!

I have a new conclusion: Companies having financial issues suck at playing Nostradamus!

Disclaimer  

This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.

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