Published on: 28 Aug 2014 Volume 21, Issue 22 Show by Anthony Mosco and Mark Crowley, Deloitte & Touche LLP On August 27, 2014, the FASB issued ASU 2014-15,1 which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.2 An entity must provide certain disclosures if “conditions or events raise substantial doubt about [the] entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. This Heads Up provides background on the ASU and summarizes its key provisions. Appendix A contains decision flowcharts adapted from the ASU that summarize going-concern disclosure considerations. Appendix B compares the ASU to current PCAOB auditing literature. BackgroundUnder U.S. GAAP, an entity’s financial reports reflect its assumption that it will continue as a going concern until liquidation is imminent.3 However, before liquidation is deemed imminent, an entity may have uncertainties about its ability to continue as a going concern. Because there are no specific requirements under current U.S. GAAP related to disclosing such uncertainties, auditors have used applicable auditing standards4 to assess the nature, timing, and extent of an entity’s disclosures, which has resulted in diversity in practice. The ASU is intended to alleviate that diversity. The ASU extends the responsibility for performing the going-concern assessment to management and contains guidance on (1) how to perform a going-concern assessment and (2) when going-concern disclosures would be required under U.S. GAAP. The FASB believes that requiring management to perform the assessment will enhance the timeliness, clarity, and consistency of related disclosures and improve convergence with IFRSs (which emphasize management’s responsibility for performing the going-concern assessment). However, the time horizon for the assessment (look-forward period) and the disclosure thresholds under U.S. GAAP and IFRSs will continue to differ.
Key Provisions of the ASUDisclosure ThresholdsAn entity would be required to disclose information about its potential inability to continue as a going concern when “substantial doubt” about its ability to continue as a going concern exists, which the ASU defines as follows: Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued . . . . The term probable is used consistently with its use in Topic 450 on contingencies. In applying this disclosure threshold, entities would be required to evaluate “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued.” Reasonably knowable conditions or events are those that can be identified without undue cost and effort. The ASU provides examples of events that suggest that an entity may be unable to meet its obligations. These examples, which are consistent with those in auditing literature,5 include the following: a. Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios b. Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets c. Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, and a need to significantly revise operations d. External matters, for example, legal proceedings, legislation, or similar matters that might jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.
Time HorizonIn each reporting period (including interim periods), an entity would be required to assess its ability to meet its obligations as they become due for one year after the date the financial statements are issued. In the following illustration, adapted from a handout for the FASB’s May 7, 2014, meeting, the look-forward period is illustrated and compared to current auditing standards:
Disclosure ContentThe disclosure requirements in the ASU closely align with those under current auditing literature. If an entity triggers the substantial-doubt threshold, its footnote disclosures must contain the following information, as applicable: The ASU explains that these disclosures may change over time as new information becomes available and that disclosure of how the substantial doubt was resolved is required in the period that substantial doubt no longer exists (before or after consideration of management’s plans). The ASU also states that the mitigating effects of management’s plans to alleviate substantial doubt should be evaluated only if (1) the plans are approved before the financial statement issuance date and (2) both of the following conditions are met:
Effective DateThe guidance in the ASU would be “effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016.” Early application is permitted.
Appendix A — Decision FlowchartThe flowchart below is reproduced from the ASU and depicts the decision process an entity could use in determining whether going-concern disclosures are required.
The table below, adapted from an exhibit in a handout for the FASB’s May 7, 2014, meeting compares the ASU with the PCAOB’s current auditing literature.
1 FASB Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. 2 An entity that is neither an SEC filer nor a conduit bond obligor for debt securities that are traded in a public market would use the date the financial statements are available to be issued (in a manner consistent with the ASU’s definition of “issued”). 3 In accordance with FASB Accounting Standards Codification Subtopic 205-30, Presentation of Financial Statements: Liquidation Basis of Accounting, once liquidation is deemed imminent, an entity must apply the liquidation basis of accounting. 4 PCAOB AU Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. 5 PCAOB AU Section 341.06. 6 PCAOB AU Section 341.02. Download
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