The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
Under U.S. generally accepted accounting principles (GAAP), financial statements are prepared under the presumption that the reporting entity will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.
Historically, auditors have been required by U.S. auditing standards and federal securities law to 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 financial statements being audited. However, since, as described above, the ability to present financial statements on a going concern basis of accounting is an element of financial reporting, the FASB concluded that the Accounting Standards Codification should address this topic.
Prior to this ASU, GAAP lacked guidance about management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern or to provide related footnote disclosures.
The ASU provides guidance to an entity’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by entities today in the financial statement footnotes.
As a result of this ASU, an entity’s 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 that the financial statements are issued or available to be issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The disclosure guidance provided by the ASU varies depending on whether the substantial doubt is alleviated as a result of consideration of management’s plans.
The amendments contained in this ASU apply to all companies and not-for-profit organizations. The amendments are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted.
This ASU will represent a significant change in practice for entities experiencing financial difficulty, as it now requires management analysis, which will then be subject to auditing procedures. Management’s analysis is for the time period within one year after the date the financial statements are issued or available to be issued. The auditing standard used a time period of one year from the balance sheet date. As such, this will require analysis further in the future. Additionally, the new guidance will now apply to all GAAP financial statements, as opposed to the previous auditing standard, which only applied to audited financial statements.
The full text of ASU 2014-15 is available here
Readers should not act upon information presented without individual professional consultation.
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