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Accounting Standards Update: Going Concern Disclosures

Traditionally under GAAP, financial statements are prepared using the going concern basis of accounting. This basis of accounting operates under the presumption that the reporting organization will continue to operate as a going concern (except in limited circumstances). Ultimately, this basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.

The disclosures surrounding an entity’s ability to continue as a going concern have lacked guidance in the past. It would be fair to say there was essentially no guidance in GAAP about management’s responsibility in evaluating or disclosing information such as conditions and events related to going concern issues. The Financial Accounting Standards Board (FASB) realized the stakeholder concerns about lack of guidance and has provided Accounting Standards Update – Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.

The guidance given by the standard update will provide management with principles for evaluating whether there is substantial doubt by:

  • Proving a definition of the term substantial doubt
  • Requiring an evaluation every reporting period (including interim periods)
  • Providing principles for considering the mitigating effect of management’s plans.

If substantial doubt is identified by any events or circumstances, the next step is for management to consider whether it can be alleviated by mitigating the underlying conditions and events and determine the nature of disclosure that will be required. When the substantial doubt is alleviated as a result of consideration of management’s plans, the entity must disclose:

  • Principal conditions or events that raise substantial doubt
  • Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations
  • Management’s plans that alleviated the substantial doubt

If substantial doubt cannot be alleviated, a more extensive disclosure will be required. The footnote will include a statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date the financial statements are issued. Furthermore, the entity will need to disclose:

  • Principal conditions or events that raise substantial doubt
  • Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations
  • Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt

The amendments in this update are set to take effect for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

By Josh Mitchell, CPA