New Management Responsibilities-Going Concern

By Tiffany Edwards, Audit Senior Manager
December 2014

In August 2014, the Financial Accounting Standards Board (FASB) issued 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.  This ASU applies to all entities and 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 as well as to provide related footnote disclosures.

Why the Need for this Update?
Currently, there is no guidance in GAAP regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures.  The current guidance requires 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 financial statements being audited. 

What are the Main Provisions of this Update?
Under this ASU, management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are 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.

In situations where the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables financial statement users to understand all of the following: (1) Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans), (2) Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and (3) Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

Conversely, in situations where the substantial doubt is not alleviated after consideration of management’s plans, a statement should be included 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.  Also, the entity should disclose the following information: (1) Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, (2) Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and (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.

When will this Update be Effective?
The amendments are not effective until annual periods ending after December 15, 2016, although early adoption is permitted. 

For more information pertaining to ASU No. 2014-15, please visit the FASB website.

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Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.