Accounting Alert: Coming Soon to Your Financial Statements: The Going Concern Self-Assessment

Cause for Concern

In August, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an organization’s ability to continue as a going concern and about related note disclosures. Although the presumption that an organization will continue to operate as a going concern is fundamental to the preparation of financial statements, there is no guidance in U.S. generally accepted accounting principles (U.S. GAAP) related to the concept. Due to the lack of guidance in U.S. GAAP and the differing views about when there is substantial doubt about an organization’s ability to continue as a going concern, there is diversity in whether, when, and how an organization discloses the relevant information in its notes. As a result, the amendments in this ASU should reduce diversity in the timing and content of note disclosures.

The Self-Assessment

In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Elliott Davis Observation: The new guidance requires management to evaluate whether there is substantial doubt about going concern within one year after the date the financial statements are issued. Currently, auditors evaluate whether there is substantial doubt about going concern within one year of the financial statement date. However, auditing guidance is likely to change to align with the FASB’s new guidance.

That evaluation would be based on relevant information that is known and reasonably knowable at the date that the financial statements are issued and would include assessment of factors such as:

  • Current financial condition, including available liquid funds and available access to credit;
  • Obligations due or anticipated within one year;
  • The funds necessary to maintain operations considering its current financial condition, obligations, and other expected cash flows;
  • Other adverse conditions or events such as the following:
    • Recurring operating losses, working capital deficiencies, or negative cash flows.
    • Defaults on loans or similar agreements, denial of usual trade credit from suppliers, or a need to restructure debt to avoid default.
    • External matters, such as legal proceedings, legislation, or similar matters that might jeopardize the organization’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; or an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.

 

Substantial doubt would exist when relevant conditions and events, considered in the aggregate, indicate that it’s probable that the organization will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.

The Best-Laid Plans…

Based on the self-assessment, if management identifies conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern, management will need to consider whether its plans will alleviate the substantial doubt. Management will need to consider whether (1) it’s probable that the plans will be effectively implemented and, if so, (2) it’s probable that the plans will mitigate the conditions or events that raise substantial doubt.

Elliott Davis Observation: Generally, to be considered probable of being effectively implemented, management must have approved the plan before the date that the financial statements are issued.

Tell It Like It Is

If the substantial doubt is alleviated as a result of consideration of management’s plans, the following would need to be disclosed in the notes to the financial statements:

  • Conditions or events that raised substantial doubt (before consideration of management’s plans).
  • 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 is not alleviated after consideration of management’s plans, the following would need to be disclosed in the notes to the financial statements:

  • A statement that there is substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued.
  • 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 the substantial doubt.

When Does the Self-Assessment Begin?

The first self-assessments will be made in the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. In the meantime, if you have questions, please contact your Elliott Davis advisor.

The following flowchart illustrates the decision process to follow for the self-assessment and related disclosure requirements. Click here to view.