In the nonprofit world, “going concern” refers to an auditor’s opinion or footnote disclosure that describes a scenario where there is substantial doubt about the organization’s ability to continue as a going concern. In other words, the organization’s ability to function for the foreseeable future. This doubt could be the result of a debt default, recurring operating losses, a bankruptcy filing, a negative outcome to a material lawsuit, governmental action threatening the organization’s future, or just simply not being able to pay the bills as they come due. Obviously, it is not ideal for external readers of your financial information to be alerted to such a situation, so decisions about such determinations can be very difficult.
Recent guidance from the FASB further clarifies the extent of management’s obligation to address going-concern situations. FASB ASU No. 2014-15, “Presentation of Financial Statements –Going Concern, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” codifies for the first time these standards into generally accepted accounting principles (GAAP). Prior to this update, the only responsibility to report going concern issues was placed on auditors of financial statements in AU C Section 570, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.”
This prior guidance put the decision solely on the shoulders of the auditors to make the determination as to whether they would modify their audit opinion to include a statement that substantial doubt exists. The guidance specified that, to make the determination, the look-forward period was one year from the balance sheet date.
The new guidance states that the look-forward period is one year from the financial statement issuance date, so the time horizon for consideration is now longer. The definition of “substantial doubt” in the new standard also uses a relatively high threshold of probability that the entity will become unable to meet its obligations within the look-forward period. The probability threshold is also thought to be a slightly higher threshold than under current practice.
Audit standard setters will also presumably have to change other audit standards to conform to the new guidance, so stay tuned for more to come on this important development.
If you have any questions regarding a going concern situation or other issues related to financial statements, contact your Aronson advisor or Craig Stevens of Aronson’s Nonprofit & Association Industry Services Group at 301.231.6200.