Capstone: going concern, events after the reporting period and the reporting issues memo

The final lesson brings the course together. Disclosure is where all the earlier judgments become visible to users, and three areas tie the year end together: the going concern assessment, events after the reporting period and related party transactions. The lesson then shows how Tamarind Bay's reporting team summarizes the year's significant judgments in a reporting issues memo for the audit committee, the document that connects the accounting to governance.

Going concern

ASC 205-40 requires management to evaluate, for each annual and interim period, whether there are conditions or events, considered in the aggregate, 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, or available to be issued. Substantial doubt exists when it is probable that the entity will be unable to meet its obligations as they become due within that year. If substantial doubt is raised, management considers whether its plans, such as raising capital or reducing costs, are probable of being effectively implemented and would mitigate the conditions. Disclosure is required if substantial doubt is raised, whether or not it is alleviated by management's plans, and the statements must state explicitly when substantial doubt is not alleviated. For comparison, IFRS assesses at least twelve months from the end of the reporting period, not from the issuance date, and uses the concept of material uncertainty.

Tamarind Bay is a profitable company with access to credit, so no one expects a going concern problem. But the Frozen impairment, the recall and the loss of headroom in a segment are exactly the circumstances in which audit committees ask whether covenants are safe. The treasury team prepares a covenant stress test.

# Going concern support: covenant headroom under stress (invented figures, millions).
net_debt, ebitda, interest = 728.0, 268.4, 36.6
max_lev, min_cov = 3.50, 3.00
print(f"{'Scenario':<34}{'EBITDA':>8}{'Net debt':>10}{'Leverage':>10}{'Coverage':>10}  Result")
for name, d_e, d_debt in [("Base case (2026 actual)", 0.00, 0), ("Frozen volumes -10%", -0.06, 10),
                          ("Severe: recall repeat, input costs", -0.15, 35), ("Downside: lost major customer", -0.22, 45)]:
    e = ebitda * (1 + d_e); nd = net_debt + d_debt
    lev, cov = nd / e, e / interest
    ok = lev <= max_lev and cov >= min_cov
    print(f"{name:<34}{e:>8.1f}{nd:>10.1f}{lev:>10.2f}{cov:>10.1f}  {'compliant' if ok else 'BREACH'}")
breakeven = 1 - net_debt / max_lev / ebitda
print(f"\nEBITDA could fall {breakeven:.1%} (net debt unchanged) before the leverage covenant is breached.")
# Events after the reporting period (year end December 31, 2026; SEC filer evaluates through issuance, statements issued March 2, 2027)
events = [("Jan 19: court settles a 2025 supplier dispute for 2.1 (accrual was 1.5)", "recognized"),
          ("Feb 3: fire destroys a warehouse; insured; operations relocated", "nonrecognized"),
          ("Feb 12: lab results show the October recall affected 2 more lots", "recognized"),
          ("Feb 20: board approves acquisition of an Indiana bakery brand", "nonrecognized"),
          ("Feb 26: Frozen reporting unit's largest customer files for Chapter 11", "recognized (evidence of year-end conditions)")]
print()
for e, kind in events:
    print(f"{kind:<46}{e}")

Scenario                            EBITDA  Net debt  Leverage  Coverage  Result
Base case (2026 actual)              268.4     728.0      2.71       7.3  compliant
Frozen volumes -10%                  252.3     738.0      2.93       6.9  compliant
Severe: recall repeat, input costs   228.1     763.0      3.34       6.2  compliant
Downside: lost major customer        209.4     773.0      3.69       5.7  BREACH

EBITDA could fall 22.5% (net debt unchanged) before the leverage covenant is breached.

recognized                                    Jan 19: court settles a 2025 supplier dispute for 2.1 (accrual was 1.5)
nonrecognized                                 Feb 3: fire destroys a warehouse; insured; operations relocated
recognized                                    Feb 12: lab results show the October recall affected 2 more lots
nonrecognized                                 Feb 20: board approves acquisition of an Indiana bakery brand
recognized (evidence of year-end conditions)  Feb 26: Frozen reporting unit's largest customer files for Chapter 11

The leverage covenant, net debt to covenant EBITDA of no more than 3.50 times, has headroom in the base case and in two downside scenarios, and is breached only in the severe case of losing a major customer, which would cut EBITDA by 22 percent. The impairment does not affect the covenant, because covenant EBITDA adds back impairments. Management concludes that no conditions raise substantial doubt, because the breakeven decline of 22.5 percent is far outside any probable scenario in the year after issuance and the company has an undrawn revolving credit facility of 250 million. The analysis is documented and shared with the auditor.

Covenants also affect classification. A liability is classified as current if the entity does not have the right at the end of the reporting period to defer settlement for at least twelve months, and a covenant breach at or before the reporting date can make long-term debt current unless the lender has agreed, before the reporting date under IFRS, to a waiver that gives at least twelve months' grace. Under US GAAP, a waiver obtained after the balance sheet date but before issuance can keep the debt non-current in some circumstances, a difference that matters to companies close to their limits. The IASB's 2020 and 2022 amendments to IAS 1, effective 2024, also require disclosure of information about covenants that must be complied with within twelve months, so that users can assess the risk that non-current liabilities could become repayable early. Tamarind Bay discloses its covenants and headroom.

Events after the reporting period

ASC 855 Subsequent Events distinguishes recognized subsequent events, which provide additional evidence about conditions that existed at the balance sheet date, from nonrecognized subsequent events, which arise after that date. Recognized events adjust the amounts in the statements; nonrecognized events are disclosed if they are of such a nature that disclosure is necessary to keep the statements from being misleading. An SEC filer evaluates subsequent events through the date the financial statements are issued, which for Tamarind Bay is March 2, 2027, when it files its Form 10-K; it does not disclose that date, while other entities evaluate through the date the statements are available to be issued and disclose it. The program classifies the events reported to the audit committee.

The settlement of the supplier dispute for 2.1 million confirms a liability that existed at year end, so the accrual is increased from 1.5 to 2.1 million. The laboratory results on the recall provide evidence about the extent of contamination at year end, so the recall accrual is updated. The customer's Chapter 11 filing in February typically indicates that its financial difficulty existed at year end, so Tamarind Bay increases the credit loss allowance on that customer's receivable of 6.4 million and also reconsiders the Frozen goodwill test, which assumed continuing sales to that customer. The warehouse fire and the bakery acquisition arose after year end; they are disclosed but do not change the 2026 amounts.

The customer bankruptcy shows how one event can touch several earlier judgments. Reopening the impairment test late in the year-end process is uncomfortable, but the standards require it: the test must reflect the best information available about conditions at the reporting date. Tamarind Bay's team reruns the Frozen model with the customer's volumes reduced by half and finds that the recoverable amount falls by a further 9 million. That increases the impairment and is recorded before the statements are authorized. The lesson is that year-end judgments are not final until the statements are issued.

Related party transactions

ASC 850 Related Party Disclosures requires disclosure of material related party transactions, including the nature of the relationship, a description of the transactions, the dollar amounts, amounts due to or from related parties and, if not apparent, the terms and manner of settlement. Representations that transactions were on arm's-length terms may be made only if they can be substantiated. SEC registrants must also disclose related person transactions above 120,000 dollars under Item 404 of Regulation S-K, and executive compensation in detail in the proxy statement. Tamarind Bay buys about 3.4 million a year of organic berries from a farm owned by the chief executive's brother, an immediate family member of a related person. The purchases are at prices comparable with those paid to other suppliers, but the relationship and amounts must be disclosed, and the audit committee reviews and approves the arrangement under the company's related person transactions policy.

Disclosure effectiveness

Over the course of this year end, Tamarind Bay's notes have grown: new IFRS 18 or DISE preparation, more segment information, expanded tax disclosures, supplier finance, crypto assets and the recall. Regulators and standard setters have for years urged companies to make disclosures more effective, not merely longer: to remove immaterial information, avoid boilerplate, organize notes logically, cross-refer rather than repeat, and tailor accounting policy disclosures to the entity's own material policies rather than reciting the standards. The IASB's 2021 amendments to IAS 1 require disclosure of material accounting policy information rather than significant accounting policies, and regulators have praised companies that have cut generic policy notes. Tamarind Bay's 2026 project removes about eight pages of generic policies and reorganizes its notes so that each significant judgment appears with the related amounts.

Disclosure in MD&A complements the notes. The MD&A explains results through management's eyes, covering trends, risks and uncertainties, liquidity and capital resources and critical accounting estimates, and it is where adjusted measures and key performance indicators appear, subject to the rules in lesson 3. The financial statements and MD&A must tell a consistent story: a regulator who reads about a struggling Frozen business in MD&A will check that the impairment test assumptions reflect it.

The reporting issues memo

Every year end, Tamarind Bay's chief financial officer presents a reporting issues memo to the audit committee. It lists each significant accounting judgment, the facts, the alternatives considered, the conclusion, the effect on the statements and the disclosure, and it records where management and the auditor disagreed and how the disagreement was resolved. The audit committee uses the memo to discharge its oversight responsibility, and the auditor's communication of key or critical audit matters, discussed in ACCT-431, typically mirrors its most significant items. The 2026 memo summarizes the course.

The late adjustment from the customer bankruptcy changes several figures: the goodwill impairment rises, net income and EPS fall, and the non-GAAP reconciliation and EPS note must be updated before the Form 10-K is filed. A good reporting process anticipates such changes by building the year-end model so that a change in one input flows through every affected note. The final check is consistency: the same numbers in the statements, the notes, MD&A, the earnings release and any sustainability report.

Ethics and the reporting culture

The judgments in this course can be made well or badly. The difference often comes down to culture: whether the finance team feels able to tell the chief executive that an adjustment is not acceptable, whether the audit committee asks hard questions, and whether incentives reward accurate reporting or reported results. Professional accountants are bound by codes of conduct that require integrity and objectivity, and by securities law that holds the chief financial officer personally responsible for certifying the statements. ACCT-460 shows what happens when the culture fails. The best defense is the discipline this course has practiced: identify the issue, find the requirements, weigh the alternatives against the evidence, decide without bias, document the reasoning and disclose what users need to know.