- an entity may still be capable of paying its debts as and when they fall due, but at the same time not be a going concern because the directors intend to liquidate or significantly curtail its operations within the relevant reporting period; and
- a company may still meet the criteria of being a going concern because of its intention and capacity to maintain the scale of its operations, while still facing significant uncertainty in being able to pay longer-term debts as and when they fall due.
The directors' assessment for the potential of insolvency is preemptive in nature, and arises from both statutory and contractual duties. CPA Canada has noted that there is a crucial need to ensure an early determination, in order to employ available options and avert potential default on a timely basis.
Even if there are no immediate concerns, auditors must still address whether any material uncertainties may exist that need to be noted in a company's financial statements, and be prepared to issue an adverse opinion if such uncertainties are not addressed therein.
This is further evidence of the current requirement of directors and management to be proactive in addressing their duties, as being reactive will, in almost all cases, will be too late.
In performing their duties, directors must act reasonably. It has been held that reasonable grounds do not include "unquenchable optimism," and the following list indicates factors that suggest where an unreasonable action has occurred in assessing insolvency:
- Where, although the officer has never adverted to it, there is at the objective level no reasonable or probable ground of expectation to the relevant effect;
- Where the officer himself has a subjective expectation of the relevant kind, that there is no objective ground for the expectation;
- Where, as a matter of subjective judgment, the officer lacks the expectation yet, unknown to him, there is, on an objective appraisal, a reasonable or probable ground of expectation; and
- Where the officer does not care whether the postulated event of payment will occur, and it appears that objectively there was no ground of expectation.