The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) for presentation of financial statements – going concern which is ASU 2014-15. Under generally accepted accounting principles (GAAP) continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. This is commonly referred to as the going concern basis of accounting.
Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the ability to continue as a going concern and the amendments in ASU 2014-15 should be followed to determine whether to disclose information about the conditions and events.
In current GAAP there is not guidance on management’s responsibility to evaluate going concern. United States auditing standards requires an auditor to evaluate going concern for a reasonable period of time not to exceed one year beyond the date of the year end of the entity being audited. United States auditing standards also require an auditor to determine financial statement effects, including disclosure. Due to the lack of guidance in GAAP there is diversity in practice on whether, when, and how an entity discloses the conditions and events.
The 5 Main Updates to Going Concern
The main provisions of the ASU are the following:
- Entity’s management should evaluate the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, or within one year after the date that the financial statements are available to be issued.
- The evaluation should be based on conditions and events that are known and reasonably knowable at the date the financial statements are issued or available to be issued.
- When management identifies conditions or events which create substantial doubt about the entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those conditions or events will alleviate the substantial doubt. The plans should be probable in effectiveness of implementation and also in the mitigation of the conditions or events.
- If substantial doubt is mitigated the entity should disclose information that enables users to understand conditions or events that raised substantial doubt, evaluation of significance of those conditions or events and management’s plans to alleviate the doubt.
- If substantial doubt is not alleviated the entity should include a statement in footnotes that there is substantial doubt about the entity’s ability to continue as a going concern along with disclosing conditions or events that raise substantial doubt about ability to continue as going concern, management’s evaluation of the conditions or events and management’s plans that are intended to mitigate the conditions or events.
ASU 2014-15 will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. If you have questions about this important update, please contact us today.