At the end of August, the FASB released ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
The new rule provides guidance defining management’s responsibility “to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern,” including the required footnote disclosures, when applicable.
Prior to the issuance of the new ASU, financial statement auditors were subject to guidance requiring consideration of an audited entity’s ability to continue as a going concern, but, financial statement preparers were not required to make similar evaluations.
The new rule requires management to evaluate whether there are conditions or events present 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 issued (or within one year after the date that the financial statements are available to be issued when applicable).”
Before management is required to raise the red flag, via disclosure and reporting of such conditions, if present, management can consider their plans that might mitigate the events of concern or alleviate their “substantial doubt.”
In considering management’s plans, ASU 2014-15 indicates that “the mitigating effect of management’s plans should be considered only to the extent that:
- it is probable that the plans will be effectively implemented and, if so,
- it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.”
When management has identified conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and those events (or substantial doubts) are not mitigated (or alleviated), the new rule requires disclosures in the footnotes to financial statements that include information allowing financial statement users to understand the conditions or events that gave rise to management’s substantial doubts about the ability to continue as a going concern, management’s evaluation of those conditions or events, and their plans to mitigate the identified conditions or events.
ASU 2014-15 is effective for annual and interim reporting periods beginning after December 15, 2016.