It’s Time to Apply FASB’s New Going Concern Standard

It’s time to apply FASB’s new Going Concern standard. In August 2014, the Financial Accounting Standards Board (FASB) issued Presentation of Financial Statements–Going Concern. The standard is effective for annual periods ending after December 15, 2016.

For the calendar year 2016, management needs to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the reporting entity’s ability to continue as a going concern.

Going Concern

Applicable to What Entities?

What entities is the standard applicable to? All entities.

Key Points of the Going Concern Standard

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued (or within one year after the date that the financial statements are issued when applicable).

Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are available to be issued (or at the date that the financial statements are issued when applicable).

What is Substantial Doubt?

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are available to be issued (or issued when applicable).

What if Management’s Plans Alleviate the Going Concern Issue?

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

  1. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern

What if Management’s Plans Do Not Alleviate the Going Concern Issue?

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the notes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued (or issued when applicable). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

  1. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern

Effective Date

The amendments in this standard are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Audit Standard

For audits, the guidance in AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, is applicable. This standard requires that auditors evaluate whether there is substantial doubt about the ability of a reporting entity to continue as a going concern for a reasonable period of time and assess uncertainties about the ability of a reporting entity to continue as a going concern.

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2 thoughts on “It’s Time to Apply FASB’s New Going Concern Standard

  1. Charles, timely info as always. I’ll just point out (for us old schoolers) – this is a GAAP standard, for management to follow. Going concern used to just be an audit standard. So it really becomes like estimates or contingencies – management reviews it and makes the determination, and as auditors we audit management’s decision.

    And, because it’s GAAP, management should do this whether the statement is a compilation, review or audit. You could make an argument that it would also apply to OCBOA statements.

  2. Jim, yes, I agree. It does apply to tax-basis or other OCBOAs–since we are required to follow GAAP’s lead. Glad to see this standard included in GAAP where it belongs.