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Management Soon to be Required to Assess Going Concern Under U.S. GAAP

February 23, 2015

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-15 regarding Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the standards, prior to this update, there was no guidance related to management’s responsibility to evaluate the going concern of the entity or to provide the related footnote disclosures to the financial statements. The only guidance related to going concern was included in the auditing standards, which requires the entity’s external auditors to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern within a specified time period. The auditing standards also require the auditor to assess the effects on the financial statements and the related disclosures.

This accounting standards update provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide the related footnote disclosures to the financial statements. Under the update, for each reporting period, management should evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued or available to be issued.

When management identifies these events or conditions, management must then evaluate their plans designed to mitigate those events or conditions. If the substantial doubt is alleviated as a result of management’s plans, the entity should disclose information related to management’s plans in enough detail to allow users of the financial statements to understand the following:

  • The conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern;
  • Management’s evaluation of the events or conditions; and
  • Management’s plans that alleviate the substantial doubt.

If the substantial doubt is not alleviated by management’s plans, the entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern. The entity should also disclose the conditions that raised substantial doubt, management’s evaluation and management’s plans that are intended to mitigate the events or conditions, even though management’s evaluation of their plans indicated that those plans did not alleviate the substantial doubt.

FASB’s intent of this update is to reduce diversity in the timing and content of footnote disclosures related to the entity’s ability to continue as a going concern. The amendments now provide guidance within U.S. generally accepted accounting principles relating to:

  • The definition of the term “substantial doubt”
  • Requirement for an evaluation during each reporting period (including interim periods)
  • The principles for considering management’s plans
  • Requirement for certain disclosure when plans alleviate substantial doubt
  • Requirement of an express statement and related disclosures when substantial doubt is not alleviated
  • Requirement of an assessment for a period of one year after the date that the financial statements are issued or available to be issued

The amendments in this update are effective for annual periods ending after December 15, 2016. Early application is permitted.

For more information, please contact Janet Nahorney at 860.561.6831 or jnahorney@blumshapiro.com.

 

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