by Melisa Galasso
There has been a lot of change in the area of Going Concern lately. It started with the issuance of Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern in August 2014. This ASU was long awaited. Prior to ASU 2014-15, the responsibility for assessing going concern was found in the auditing standards. The AICPA had originally not issued any guidance regarding going concern during its Clarity project as the FASB had a project on its agenda that would have moved the responsibility for assessing going concern from the auditor to management. However, when the ASU was not issued in time, the AICPA issued SAS 126 in 2012 which retained the responsibility to assess going concern. Fast forward to 2014 and the FASB project resulted in the issuance of an ASU which transferred the responsibility to management to evaluate whether there was substantial doubt about an entity’s ability to continue as a going concern. However, many issues quickly were identified upon its issuance.
- Timeframe: Under ASU 2014-15 an entity’s management would consider each reporting period (at least annually) whether the entity would be able to continue as a going concern one year from the issuance of the financial statements. SAS 126 required auditors to consider going concern for a “reasonable period” which was defined as “a period of time not to exceed one year beyond the date of the financial statements being audited.”
- Substantial Doubt: The ASU provides a definition of the term “substantial doubt.” If management identifies conditions that raise doubt about the entities ability to continue as a going concern, management can that evaluate whether their plans can alleviate those conditions. Even if the doubt is alleviated, there are still required disclosures regarding the conditions or events that raised the doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that alleviated the substantial doubt. If management’s plans do not alleviate the substantial doubt, the ASU requires that management include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern. In addition, the disclosures regarding the conditions and events leading to their assessment as well as their significance are required to be disclosed. However, management can detail any plans that have to mitigate the conditions or events that created the doubt.
- Application: While SAS 126 only applies to audits for consideration of going concern, the movement to FASB guidance would require management to consider going concern for any level of service (compilations, reviews, audits etc.).
These differences between SAS 126 and ASU 2014-15 created concern among practitioners. If their clients were considering a different period of time, would that change their responsibility? The AICPA quickly added Going Concern back to its agenda. In addition, the PCAOB and international standard setters also had going concern projects on their agendas.
In January 2015, the AICPA issued four auditing interpretations regarding going concern. The four new auditing interpretations addressed the definition of substantial doubt about an entity’s ability to continue as a going concern, the definition of reasonable period of time, interim financial information and consideration of financial statement effects. The interpretations indicated that once a client implemented 2014-15, the auditor should use the same definition of substantial doubt as the client in their determination of going concern under the auditing standards. To deal with the conflict between the time period for consideration of going concern, the auditing interpretations indicated that auditors should use the period of time required by the applicable financial reporting framework. This meant that once a client adopted the new standard, the auditor’s time reference for consideration would also extend to one year from the balance sheet date. This would only change however upon adoption or the requirement to comply with ASU 2015-14. If an auditor became aware of conditions that raised doubt during an interim period, they would then be required to inquire of management about its plans for dealing with the adverse effects of the conditions and events as part of their review of the interim statements and consider the adequacy of the disclosure based on the applicable financial reporting framework. Finally, the interpretations provide guidance on how to assess management’s plan and whether it alleviated substantial doubt. Once a client adopted the FASB guidance, the auditor would then use the assessment criteria in the applicable financial reporting framework and would use the disclosure requirements per the framework to determine if disclosures are adequate.
For financial reporting frameworks that do not address going concern, the current AU-C 570 guidance would continue to be used. As a result, in April 2015 the GASB added a Going Concern project to its research agenda.
Auditors should insure that they inquire of clients as to when they intend to adopt ASU 2014-15 to insure they are using the proper frame of reference in their going concern assessments.
ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. While originally not permitted in the early discussions, early adoption was permitted.