Candi Avery, CPA, CGMA
Up until now, there has not been guidance related to going concern analysis and financial statement disclosure requirements in U.S. GAAP. Existing guidance has been embedded in the auditing standards, which have always required that auditors, not management, evaluate an organization’s ability to continue as a going concern for a reasonable period of time.
To help provide clarity around the issue, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
One common theme you will see as we move through the requirements of the new standard, is the going concern analysis and disclosure shifting from an auditor’s assessment to a management’s assessment. As substantial doubt and uncertainties about going concern would likely be a material financial statement disclosure, it makes sense for it to be incorporated into U.S. GAAP financial reporting requirements.
Look Forward Period
The look forward period is one of the more significant changes. The auditing standards require the auditor to evaluate relevant conditions and events about an entity’s ability to continue as a going concern one year from the financial statement date. ASU 2014-15 requires that the look forward period for management’s analysis be one year from the date that the financial statements are available for issuing. This is typically several months after the fiscal year-end.
Defines Substantial Doubt
Prior to ASU 2014-15, a definition for substantial doubt did not exist. However, the new guidance says that substantial doubt 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 that the financial statements are available to be issued. The FASB’s definition could be perceived as a higher threshold than current practice as the term “probable” means likely to occur.
Assessing Substantial Doubt
Under the new standard, management should evaluate all relevant known conditions, or those that can be reasonably expected to happen as of the date the financial statements are to be issued. This evaluation should be both qualitative and quantitative in nature, and should include conditions that might give rise to substantial doubt. Information to consider could include the current financial condition, available cash, access to credit, obligations that are due or anticipated, and cash flow projections to fund operations. It is important to note that the process of determining substantial doubt is independent from any mitigating effects that result from management’s plan.
Assessing Mitigating Factors
If management determines that substantial doubt does exist, the next step is to evaluate management’s plan for alleviating the substantial doubt. The guidance says that only plans that have been approved prior to the issuance of the financial statements should be considered. As such, management and the board need to determine and approve a well thought-out game plan, versus a basket of potential ideas. Management then needs to determine whether they can effectively implement the plan, and whether the plan, once implemented, will it alleviate the conditions that raise the substantial doubt.
Disclosure and Reporting Requirement
If management’s plan alleviates substantial doubt, the organization should disclose:
- Principal conditions or events that raised substantial doubt about the organization’s ability to continue as a going concern
- Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations
- Management’s plans for alleviating substantial doubt about the organization’s ability to continue as a going concern
If management concludes the substantial doubt is not alleviated, the organization should disclose:
- Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
- Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
- Management’s plans for mitigating the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
- Include a statement that there is “substantial doubt about the entity’s ability to continue as a going concern within one year from issuance date”
ASU 2014-15 becomes effective for periods ending after December 15, 2016. If you believe your organization is in a situation that will warrant a going concern analysis, we encourage you to become familiar with the guidance.
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