March 19, 2015
Accounting Standard Update on an Entity’s Ability to Continue as a Going Concern
Posted by Sean Batchelor
In August of 2014, the Public Company Accounting Oversight Board (PCAOB) released Accounting Standard Update (ASU) No. 2014-15 “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update transfers some of the burden of going-concern evaluation from auditors to entity management.
Currently, under Generally Accepted Accounting Principles (GAAP), continuation of a reporting entity as a going concern is presumed unless the entity’s liquidation becomes imminent. GAAP 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 financial statements being audited. There is no guidance in GAAP about 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 amendments in this Update provide that guidance.
So, what has changed? When preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, 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.
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. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments are as follows:
(1) Provide a definition of the term substantial doubt,
(2) require an evaluation every reporting period including interim periods,
(3) provide principles for considering the mitigating effect of management’s plans,
(4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans,
(5) require an express statement and other disclosures when substantial doubt is not alleviated, and
(6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).
Note that a disclosure is needed whenever substantial doubt exists about the entity’s ability to continue as a going concern (even if management has mitigating plans). I will also point out that auditors may begin to require a key SOX control surrounding the requirements of this amendment.
The amendments in this Update apply to all entities and are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
This should help clarify some of the confusion surrounding going-concern evaluations for businesses.
A senior manager in the Governance, Risk and Compliance (GRC) practice at Armanino, Sean has over 10 years of experience in corporate and public accounting. He serves clients in a broad range of industries, including high tech, manufacturing, financial services, private lending and insurance. His expertise includes reviewing operational, financial, and technology processes to provide management with an individual assessment of business risk, internal controls, and the overall effectiveness and efficiency of processes. He also assesses and educates companies on the risks associated with Sarbanes-Oxley (SOX), as they pertain to internal controls.
Sean received his B.S. in business administration from the University of the Pacific. He is a member of the California Society of Certified Public Accountants and the American Institute of Certified Public Accountants.