FASB defines management’s going-concern responsibilities

FASB issued a new financial reporting standard Wednesday defining 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.

The standard provides new guidance, as current GAAP does not describe management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or provide disclosures in the footnotes.

Accounting Standards Update 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, provides principles and definitions for management that are intended to reduce diversity in the timing and content of disclosures provided in footnotes.

Under the standard, management is required to evaluate for each annual and interim reporting period whether it is probable that the entity will not be able to meet its obligations as they become due within one year after the date that financial statements are issued (or are available to be issued, where applicable).

When management identifies substantial doubt about the entity’s ability to continue as a going concern, management should consider whether its plans to mitigate conditions will alleviate the substantial doubt. If management’s plans alleviate the substantial doubt, the entity should disclose information on:

• Conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern.
• Management’s evaluation of the significance of those conditions or events, in relation to the entity’s ability to meet its obligations.
• Management’s plans that alleviated the substantial doubt about the entity’s ability to continue as a going concern.

If management’s plans do not alleviate substantial doubt, management will be required to include a statement in the footnotes indicating that 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 or are available to be issued.

The entity also would be required to make similar disclosures to those made by entities whose substantial doubt is alleviated. An entity whose substantial doubt about its ability to continue is not alleviated by management’s plans would disclose information that enables financial statement users to understand the conditions that raise substantial doubt, management’s evaluation of the significance of those conditions or events related to the ability to meet obligations, and management’s plans to mitigate those conditions.

The amendments apply to all companies and not-for-profit organizations. They will take effect in the annual periods ending after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2016. Early application is permitted.

“This update responds to stakeholder concerns about the diversity that currently exists in footnote disclosures because of the lack of guidance in GAAP and the differing views in practice about when substantial doubt exists,” FASB Technical Director Sue Cosper said in a news release. “It improves the comparability of these disclosures by providing guidance on when there is substantial doubt and how the underlying conditions and events should be disclosed in the footnotes.”

The standard clears the way for the PCAOB to reconsider its going-concern standard for public company auditors. The PCAOB has said any proposed revisions to the auditing standard would take into consideration changes arising from FASB’s consideration of an accounting standards update in this area.

Center for Audit Quality (CAQ) Executive Director Cindy Fornelli said in a news release that the update represents an improvement over the current going-concern model. The CAQ is affiliated with the AICPA.

“The CAQ encourages accounting and auditing standard setters to continue to work together to develop complementary standards which would further benefit financial statement users,” Fornelli said.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.