Accounting Standards UpdateMarch 20, 2015
Michael J. Thibodeau, CPA, MSA
The Financial Accounting Standards Board (FASB) continues to approve accounting standards updates, focusing on areas in which a significant amount of questions or uncertainty arise. Some of the recent updates affecting manufacturers, distributors and retailers relate to the liquidation basis of accounting, going concern evaluation and disclosure and the elimination of extraordinary items.
Liquidation Basis of Accounting
In April 2013, the FASB voted to approve Accounting Standards Update (ASU) 2013-07, which requires an entity to prepare its financial statements using the liquidation basis of accounting when determining that liquidation is imminent. The changes in ASU 2013-07 are effective for the annual reporting periods beginning after December 15, 2013 and interim reporting periods therein. These changes should be applied prospectively once liquidation is deemed imminent.
Under existing U.S. GAAP, minimal guidance was available regarding when companies should apply the liquidation basis of accounting. In addition to clarifying the current standards, this update also provides principles for the recognition and measurement of assets and liabilities under the liquidation basis of accounting.
Liquidation is considered imminent when the likelihood an entity will return from liquidation is remote. If a plan for liquidation has been approved by individuals in positions of authority or liquidation, it being forced by a third party such as bankruptcy, liquidation is considered imminent.
If a company deems liquidation to be imminent, it is required to prepare its financial statements using the liquidation basis of accounting. Assets are required to be presented at the amount of expected cash proceeds from the liquidation and liabilities to be presented in accordance with U.S. GAAP, without any assumption of any legal release of liabilities. The company is also required to disclose the plan for liquidation, the methods and assumptions used to value the assets and liabilities, the amount of costs and income accrued and the expected duration of the liquidation process.
Going Concern Evaluation and Disclosure
In August 2014, the FASB voted to approve ASU 2014-15, which provides guidance on the responsibility of management to evaluate whether there is substantial doubt for an entity to continue as a going concern. The changes in ASU 2014-15 are effective for annual periods ending after December 15, 2016. Early adoption is permitted.
Under existing U.S. GAAP, there is no guidance regarding management’s responsibility for a going concern evaluation, or to prepare related disclosures. U.S. auditing standards required auditors to perform the going concern evaluation for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited, and to disclose potential effects on the financial statements.
The update requires management to evaluate whether there are any conditions that indicate substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued for each annual and interim reporting period.
The update defines substantial doubt for the purposes of this evaluation. Substantial doubt exists when there is an indication that it is probable the entity will not be able to meet its obligations as they become due, within one year of the financial statements being issued.
If substantial doubt exists, management should evaluate its plan to mitigate the conditions causing this substantial doubt and whether it will be alleviated. Should the substantial doubt be alleviated through management’s plans, the entity should disclose the conditions that raised the substantial doubt, management’s evaluation of those conditions and management’s plans that alleviated the conditions. If the substantial doubt is not alleviated, the entity should disclose the same items as above, in addition to a statement noting there is substantial doubt about the entity’s ability to continue as a going concern.
Elimination of Extraordinary items
In January 2015, the FASB voted to approve ASU 2015-01, which eliminates the concept of extraordinary items in an entity’s income statement. The changes in ASU 2014-15 are effective for fiscal years and interim periods commencing within those fiscal years, beginning after December 2015. Early adoption is permitted provided the guidance is applied from the beginning of the fiscal year of adoption.
Under existing U.S. GAAP, an entity is required to separately classify, present and disclose extraordinary events and transactions. Two criteria are required to be met in order for an event or transaction to be classified as extraordinary. The first criterion is that the event is unusual in nature, meaning it has a high degree of abnormality and is unrelated to the ordinary activities of the entity. The second criterion is that the event’s occurrence is infrequent, meaning it is not reasonably expected to recur in the foreseeable future. There has been a wide interpretation of these criteria resulting in inconsistencies in reporting.
ASU 2015-01 eliminates the concept of extraordinary items. FASB believes this will avoid inconsistencies in reporting, save time and reduce costs. In addition, this update provides more consistency with International Financial Reporting Standards, which do not permit the presentation or disclosure of extraordinary items.
Michael J. Thibodeau, CPA, MSA is an audit manager in BlumShapiro’s West Hartford (CT) office. BlumShapiro is the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with over 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.