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.
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.
FASB has an outstanding exposure draft on a proposed standard on management’s responsibility to evaluate a company’s ability to continue as a going concern. The proposed guidance changes the responsibility of assessment to management and the time horizon for management’s evaluation from “a reasonable period of time not to exceed one year” to a period that is “at least, but is not limited to, 12 months” from the end of the reporting period.
The Board is currently in redeliberations and is considering broadening the scope of the project to enhance disclosures on short-term and long-term risks for which there is a more-than-remote likelihood of occurrence. In addition, the Board plans to address (1) defining substantial doubt in terms of the entity’s ability to continue as a going concern and (2) when it would be appropriate to apply the liquidation basis of accounting. The FASB project plan indicates a final standard is expected in 2010. Those interested can monitor the status of this project at http://www.fasb.org/. You can find the exposure draft at www.fasb.org/ed_going_concern.pdf