New challenges in a delicate process

Editor’s note: This feature was prepared by the AICPA Center for Plain English Accounting.

A new look-forward period, disparities with audit guidance, and a new triggering threshold are among the many challenges CPAs will have to consider as FASB’s new going-concern standard takes effect. Some organizations may even choose to avoid using GAAP for their financial statements to bypass this challenge.

FASB Accounting Standards Update (ASU) No. 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, officially codifies management’s going-concern responsibilities into GAAP. The standard establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and whether to provide related disclosures. The standard is effective for years ending after Dec. 15, 2016, with early adoption permitted.

The look-forward period is one of the most significant changes in the new guidance. Current audit guidance differs from the new standard on the definition of the look-forward period. AU-C Section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, defines the look-forward period to end one year from the financial statement date. The new FASB guidance requires consideration of the entity’s ability to continue as a going concern one year from the financial statement issuance date (or at the date that the financial statements are available to be issued, when applicable).

Going-concern issues disproportionately apply to smaller entities. The frequency of going-concern emphasis-of-matter opinions for SEC registrants from 2000 to 2010 was 36.7% among companies with market capitalization of $75 million or less, and 3.7% for companies with market capitalization between $75 million and $500 million, according to a study published in 2013 in the American Accounting Association’s Auditing: A Journal of Practice & Theory.

Since non-SEC registrants do not generally have statutory obligations to file timely financial statements using GAAP, some of these entities and their independent CPAs have managed risks associated with going concern by waiting to issue financial statements until shortly before or after one year from the financial statement date. Others did not believe that going-concern responsibilities ended one year from the financial statement date. The new standard’s look-forward period eliminates this diversity, but it is uncertain if non-SEC registrants will desire to consider the required going-concern evaluation when the results of the going-concern evaluation are unclear. In the past, some entities have decided that it is better to have no external financial statements than to have external financial statements with going-concern disclosures.

Another item worthy of attention is the definition of “substantial doubt” in the standard. FASB has noted diversity in practice regarding how “substantial doubt” was defined and applied. The definition of “substantial doubt” in the standard uses a relatively high threshold of “probable” that the entity will be unable to meet its obligations as they become due within the look-forward period. The “probable” threshold was cited as a slightly higher threshold for “substantial doubt” than current practice, based on an academic study cited by FASB.  

Meanwhile, auditing standard setters are examining disparities between their rules for going concern and FASB’s during the look-forward period. The AICPA Auditing Standards Board (ASB) has a task force looking at changes that should be made to AU-C Section 570 as a result of FASB’s new accounting standard and the revised auditing standard soon to be finalized by the International Auditing and Assurance Standards Board (IAASB). The ASB is monitoring the work of the IAASB and the PCAOB, which also may change its rules as a result of the new accounting standard. However, it is unlikely that the revisions to AU-C Section 570 will be completed by the time the FASB standard becomes effective.

Ultimately, these challenges may result in fewer financial statements being prepared in accordance with GAAP. A recent audience poll during a Center for Plain English Accounting webcast indicated that over 60% of respondents anticipated changes in practice for affected entities as a result of the new standard, including not issuing GAAP financial statements, statement delays, and increased use of an other comprehensive basis of accounting (OCBOA).

Kristy Illuzzi (killuzzi@aicpa.org) is a senior technical manager with the AICPA Center for Plain English Accounting, the Institute’s national auditing and accounting resource center. For more information, visit aicpa.org/CPEA.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at ktysiac@aicpa.org or 919-402-2112.