GASBS No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, provided the accounting standards going concern requirements for state and local governments effective March 2009 (codified in GASB Cod. Sec. 2250.117-.120). In August 2014, the FASB issued ASU 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, to provide accounting guidance to nongovernmental entities about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosure requirements.
Now that the FASB has issued a going concern accounting standard for nongovernmental entities, the AICPA’s Auditing Standards Board (ASB) is expected to consider revising AU-C 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, to remove accounting guidance and to address inconsistencies between the auditing standards and the accounting standards.
Refresher on GASB’s Going Concern Requirements
GASBS No. 56 generally adopted the auditing standards guidance from the auditing standards regarding going concern requirements that were in force at the time, including providing indicators as to when there may be a substantial doubt about a governmental entity’s ability to continue as a going concern. The Standard requires financial statement preparers to evaluate whether there is a substantial doubt about a governmental entity’s ability to continue as a going concern for 12 months beyond the financial statement date; however, the Standard added that this period may be extended if there is information currently known to the governmental entity that may raise substantial doubt shortly afterward (a three-month period is provided as an example) and such information should be considered. The Standard also requires certain disclosure requirements when a governmental entity determines that a substantial doubt exists. The going concern standard requirements are codified in GASB Cod. Sec. 2250.117-.120.
Reconciling Accounting and Auditing Standards
As previously mentioned, the ASB is expected to revise AU-C 570 . In January 2015, the AICPA issued the following Interpretations to AU-C 570 to address certain differences between AU-C 570 and the GASB and FASB accounting guidance and to provide guidance on what to do until the revisions to AU-C 570 are issued:
- Definition of Substantial Doubt About an Entity’s Ability to Continue as a Going Concern ( AU-C 9570.01-.02 ).
- Definition of Reasonable Period of Time ( AU-C 9570.03-.05 ).
- Interim Financial Information ( AU-C 9570.06-.08 ).
- Consideration of Financial Statement Effects ( AU-C 9570.09-.10 ).
Those Interpretations that relate to audit engagements clarify that because the auditor is required to form an opinion about whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, the auditor should look to the requirements of the applicable financial reporting framework. In other words, the auditor would consider the definition of substantial doubt in GASB Cod. Sec. 2250.117 and would use a look-forward period of 12 months after the financial statement date and consider currently known information that may raise substantial doubt shortly thereafter.
Additionally, the auditor would consider the disclosure requirements of GASB Cod. Sec. 2250.120 when evaluating whether the financial statements are presented fairly. The Interpretation on interim financial information also clarifies that the auditor should look to the applicable financial reporting framework when performing an interim review.