Addressing Businesses' Going Concern Aspect Through Subordination Agreements

Overview

Businesses exist in perpetuity whilst some are meant to operate for a limited period towards a particular project. Section 102 of the Companies and Other Business Entities Act [Chapter 24:31] require companies to satisfy the Solvency and Liquidity Test at a given time. Financial statements are also prepared on a going concern basis unless there is winding up or a project for which an enterprise was established is coming to an end. Paragraph 26 of International Accounting Standard 1 (IAS 1) requires management to consider factors which might affect the going concern of a business and to disclose such in its financial statements in line with paragraph 25. Net liability, adverse key financial ratios, negative operating cash flows, inability to pay creditors, inability to adhere to loan agreements, loss of key management, loss of major market and failure to meet minimum capital thresholds are indicators of going concern challenges. Subordination agreements may