FASB Improved Reporting | RKL LLP
Posted on: September 25th, 2014

FASB Issues Guidance to Improve Financial Reporting for Going Concern Uncertainties

The FASB recently issued guidance which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.

ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40) is effective for annual and interim periods ending after December 15, 2016, with early adoption permitted.

Background of the ASU

Under U.S. 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.

However, even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.  U.S. auditing standards (GAAS) and federal securities law require that an auditor evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the issuance of the financial statements being audited.  GAAS also requires the auditor to evaluate the possible financial statement effects, including footnote disclosures on uncertainties about the entity’s ability to continue as a going concern for a reasonable period of time.  GAAP, however, does not currently provide any guidance about going concern issues for an entity or related financial statement and footnote disclosures.

The FASB believes that this ASU closes the gap which currently exists between the auditing requirements and the lack of guidance in GAAP.

Details of the ASU

In connection with the preparation of the financial statements for each annual or interim period, management should evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date financial statements are issued, or available to be issued.

Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date the financial statements are issued, or available to be issued.  Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that is probable that the entity will be unable to meet its obligations as they become due within one year after the date of financial statement issuance.  Probable in this context, is defined as an event that is likely to occur.

If management identifies conditions or events that raise going concern doubts, the next step is to consider whether future plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt.  The mitigating effect of these future plans should only be considered to the extent that (1) it is probable the future plans will be implemented and (2) it is probable the future plans will have a mitigating effect.

Required Disclosures

If management’s plans alleviate the substantial doubt about the entity’s ability to continue as a going concern, the entity should disclose the following information in its financial statements:

  1.  Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern.
  2. Management’s evaluation of the significance of these conditions or events in relation to the entity’s ability to meet its obligations.
  3. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

If management’s plans do not alleviate the substantial doubt about the entity’s ability to continue as a going concern, the entity should include a statement in the footnotes indicating there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued.  Additionally, the following information should be disclosed in the financial statements:

  1.  Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern.
  2. Management’s evaluation of the significance of these conditions or events in relation to the entity’s ability to meet its obligations.
  3. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

Practical Considerations

Presently, similar disclosures are included in the footnotes if a substantial doubt about going concern exists.  However, before this guidance, management did not have an explicit requirement for their responsibility to assess and disclose going concern uncertainties.  Additionally, this standard provides specific guidance on when and how to disclose the uncertainties.  As described above, this guidance closes the loop that was missing from the current accounting standards, but which did exist in the auditing standards.

Have questions about this guidance? RKL is here to help. Contact your RKL advisor or one of our local offices for details and assistance in assessing the impact of adoption.

New Goodwill Accounting Guidance from PCCContributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial, not-for-profit and governmental organizations. 

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