The Financial Accounting Standards Board has issued a new accounting standards update to provide guidance on disclosing uncertainties about a business’s ability to continue as a going concern, while further distancing U.S. GAAP from International Financial Reporting Standards.
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, offers guidance to improve financial reporting of going concern uncertainties, focusing on 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.
Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting and is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.
Currently, U.S. GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures.
The update provides guidance to an organization’s management, with principles and definitions intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.
“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,” said FASB technical director Susan M. Cosper in a statement. “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 updates move U.S. GAAP further apart from International Financial Reporting Standards. Under IFRS, disclosures are required when management is aware of material uncertainties related to events and conditions that may cast significant doubt about an entity’s ability to continue as a going concern. Under the new amendments to U.S. GAAP, disclosures are required when there is substantial doubt about an entity’s ability to continue as a going concern or when substantial doubt is alleviated as a result of consideration of management’s plans. Under IFRS, the assessment period is at least one year from the financial statement date or balance sheet date with no upper time limit. Under the amendments to U.S. GAAP in the update, the assessment period is within one year after the date that the financial statements are issued or available to be issued.
The amendments in the update apply to all companies and not-for-profit organizations. They become effective in the annual period ending after Dec. 15, 2016, with early application permitted. The update and a FASB In Focus document are available on FASB’s Web site at www.fasb.org.
The Center for Audit Quality praised FASB's new guidance. “The CAQ commends FASB for its efforts in developing a standard that provides guidance regarding a preparer’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern, and, where required, to provide footnote disclosures about going concern uncertainties each reporting period,” said CAQ executive director Cindy Fornelli in a statement. “We believe the adopted ASU represents an improvement over the current going concern model and will provide users of financial statements with more clarity on the nature of conditions or events that may raise substantial doubt about the entity’s ability to continue as a going concern. The CAQ encourages accounting and auditing standard-setters to continue to work together to develop complementary standards which would further benefit financial statement users.”
The new standards update will put the onus on management to make more timely disclosures. “If there is substantial doubt about the entity’s ability to continue as a going concern, management must provide disclosures around the circumstances leading to that situation and possible mitigating or remediating plans,” said Anne-Lise Vivier, accounting publications managing editor with the Tax & Accounting business of Thomson Reuters.