FASB Accounting Standards Update (ASU) 2014-15 changes the disclosure requirements of the going concern concept for organizations with annual periods ending after December 15, 2016. This new standard makes organizational management responsible for assessing going concern internally. Previously, the U.S. Generally Accepted Accounting Principles’ (GAAP) did not provide set guidance on these requirements and going concern assessments were only required as an audit procedure. This updated standard changes the assessment period; organizations have one year after the financial statements are available or issued, rather than one year after the balance sheet date.
The new FASB update defines a going concern issue as “substantial doubt that the entity will be able to meet its obligations as they become due within one year after the date that the financial statements are issued.” An organization that is highly capitalized and has good credit may need to recognize a going concern issue if they plan on deferring a significant amount of payments. They may elect to disclose that this issue will be sufficiently alleviated by the deferral, but they are still required to disclose that a going concern issue existed.
Management is required to assess the conditions that may make financial statement users doubt the entity’s ability to continue as a going concern. They must also assess whether there are effective plans in place to alleviate these conditions. If it is determined that the substantial doubt is able to be mitigated through management plans, the financial statements must disclose the conditions raising that doubt. Additionally, management must evaluate the conditions and have plans in place to alleviate the doubt. If it is unable to be mitigated, the statements should disclose that there is substantial doubt about the entity’s ability to continue as a going concern, conditions raising doubt, management’s evaluation of the conditions, and their plans to mitigate the doubt.
This new update aims to make the timing and substance of going concern footnotes more consistent and clear. Previously, there was possible confusion around whether going concern issues existed and could be mitigated. Users could jump to the conclusion that the company would go out of business even if all doubt could be sufficiently mitigated. The guidance now in effect aims to avoid these misunderstandings by providing more cohesive instructions for the proper evaluation and disclosure of going concern issues.
Making sure that material subsequent events are disclosed in financial statements has long been an audit requirement . The introduction of FASB’s SFAS No. 165 ” Subsequent Events ” shifts that responsibility to the internal preparers of financial statements and explicitly makes it the nonprofits not the auditors responsibility to have correctly treated subsequent events .