Going concern is an accounting assumption that an entity has the resources to continue operating for the foreseeable future. It helps assure key stakeholders that the business has a secure financial future. The FASB issued ASU 2014-15 providing guidance on determining when and how to disclose going concern uncertainties in the financial statements. Since it was issued, there has been ongoing confusion surrounding its implementation. This ASU affects all companies and not-for-profit organizations, so it’s important to understand how to adjust to the update. Below we go into the details to better understand the standard.
Background on Going Concern
Under U.S. GAAP, an entity’s financial statements reflect its assumption that it will continue as a going concern. However, an entity may have uncertainties about its ability to continue as a going concern. Because there were previously no specific requirements under U.S. GAAP related to disclosing such uncertainties, auditors have used applicable auditing standard to assess an entity’s ability to continue as a going concern, which has resulted in diversity in practice. The ASU is designed to alleviate that diversity.
Key Provisions of the ASU v. the Auditing Standard
This ASU is a significant change in practice for entities experiencing financial difficulty, as it now requires management analysis, which will be subject to auditing procedures. Additionally, the guidance applies to all U.S. GAAP financial statements, as opposed to the auditing standard, which only applies to audited financial statements.
Who Is Responsible for Preparing the Analysis?
The ASU places the responsibility for performing the annual going-concern assessment on management and contains guidance on how to perform a going-concern assessment and when disclosures are required. Under the ASU, making a determining regarding substantial doubt, conditions and events that exist should be analyzed in the aggregate. The ASU provides examples of relevant conditions and events.
Under the auditing standard, an auditor is required to evaluate the adequacy of going concern disclosures after concluding that there is substantial doubt about the entity’s ability to continue as a going concern.
It is critical management prepare an analysis. If management fails to prepare an analysis the auditor will likely consider this control deficiency as a significant deficiency or material weakness.
How Is Substantial Doubt Defined?
The ASU uses a probable threshold to define substantial doubt. The term probable is used consistently with its use in Topic 450 on contingencies, meaning “likely to occur”.
Conversely, the auditing standard does not define substantial doubt. The ASU’s basis for conclusions notes that some auditors and stakeholders previously viewed substantial doubt threshold as a lower threshold than the probable threshold. As a result, there could be fewer going concern disclosures under the ASU than there were under the auditing standard!
What is the Look Forward Period?
Annually, a privately held entity is required to assess its ability to meet its obligations as they become due for one year after the date the financial statements are issued. The auditing standard requires auditors to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time which is also defined as within one year after the date the financial statements are issued.
Implications of the change in the look-forward period may include the need to change forecasting to reflect the extended period, which may be a period that is not typically analyzed, and a possible need to obtain debt covenant waivers for an additional period.
When Are Disclosures Required?
No disclosures are required when management concludes that substantial doubt isn’t raised based on their evaluation of conditions and events, prior to consideration of potential mitigating effects of management’s plans that aren’t implemented.
If an entity triggers the substantial doubt threshold, its footnote disclosures must contain the following information:
If Substantial Doubt is Alleviated:
When it’s probable that management’s plans will be effectively implemented within one year after the date that the financial statements are issued and it is probable that management’s plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern substantial doubt is alleviated. In this case, the footnotes should disclose information that enables the users of the financial statements to understand management’s evaluation and related plans to mitigate those conditions or events. Generally, to be considered probable of being effectively implemented, plans must be approved by management or others with the appropriate authority before the financial statements are issued.
If Substantial Doubt Remains:
In addition to the above disclosures, when substantial doubt remains, the footnotes should include a statement indicating there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
We’re here to help. To better understand how this standard impacts your financial reporting, contact an Anders advisor.
Audit supervisor Laura A. Long, CPA was a contributor to this post.