New Accounting Standard Tackles Disclosures About Business Continuity– September 09, 2014

The Financial Accounting Standards Board (FASB) has updated U.S. Generally Accepted Accounting Principles (GAAP) to eliminate a critical gap in existing standards. The new guidance, found in 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, clarifies the disclosures management must make in the organization’s financial statement footnotes when management has substantial doubt about its ability to continue as a “going concern.” The guidance applies to all companies and will take effect for the annual financial statement period ending after December 15, 2016.

The gap in GAAP
Until now, GAAP provided no guidance on management’s responsibility to evaluate or disclose certain adverse conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern. Although footnote disclosures regarding these conditions have commonly been provided, different organizations have had different views about when substantial doubt exists. This has led to variations in whether, when, and how organizations disclose the relevant conditions and events.

Other prevailing standards
U.S. auditing standards require auditors — not management — to evaluate whether there’s substantial doubt about an organization’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. U.S. auditing standards further require auditors to consider the possible financial statement effects, including footnote disclosures on uncertainties about an organization’s ability to continue for a reasonable period of time.

Evaluating “substantial doubt”
The disclosures required under the new guidance, therefore, may not substantially alter the information disclosed in many audited financial statements. The ASU’s definition of “substantial doubt” calls for a focus on significant uncertainties about an organization’s ability to continue, rather than requiring a broader consideration of all uncertainties and risk factors.

Under the new standard, an organization’s management must evaluate whether conditions or events raise substantial doubt about the organization’s ability to continue as a going concern for a period of one year from the date the financial statements are available to be issued. Substantial doubt exists when conditions or events, considered in the aggregate, indicate that it’s probable that the organization will be unable to meet its obligations as they become due within one year.

Management’s evaluation should consider both qualitative and quantitative information about relevant conditions and events. This information includes the organization’s current financial condition, conditional and unconditional obligations due or anticipated within one year, and the funds necessary to maintain operations.

Disclosure requirements
When management identifies conditions or events that raise substantial doubt, it must consider whether its plans for mitigating those conditions or events will be effective. The mitigating effect of the plans should be considered only to the extent that:

  1. It’s probable that the plans will be effectively implemented, and, if so,
  2. It’s probable that the plans will mitigate the conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern.

Certain disclosures are required depending on whether or not the plans alleviate the substantial doubt. If conditions or events continue to raise substantial doubt in subsequent reporting periods, the organization should continue to make the required going concern disclosures in those periods. Disclosures should become more extensive as additional information becomes available about relevant conditions or events and management’s plans.

Effective date
As mentioned, the changes in ASU 2014-15 will take effect for the annual financial statement period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.


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