Magazine article The CPA Journal

Changes to Going Concern Disclosures: Accounting Guidance Shifts Responsibilities to Management

Magazine article The CPA Journal

Changes to Going Concern Disclosures: Accounting Guidance Shifts Responsibilities to Management

Article excerpt

istorically, auditors of financial statements have been charged with the assessment of an entity's ability to continue as a going concern (see AU 341, "The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern"). But nowhere in U.S. GAAP was management specifically charged with this responsibility, even though management has overall responsibility for the financial statements. Some would assert that encumbering the auditor with primary responsibility for monitoring going concern creates a serious lack of auditor independence, because the auditor is charged with assuming a management-type responsibility. This is about to change.

In August 2014, FASB released ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern [Accounting Standards Codification (ASC) 205-40], This new standard specifically requires management to evaluate going concern and make disclosures in the notes to the financial statements when appropriate. The auditor will, in turn, audit management's disclosures.

This article covers the major provisions of this new standard, which will be effective for fiscal years (and interim periods) ending after December 15,2016, with early application permitted ASU 2014-15 does not replace existing auditing guidance on going ccncem. Moreover, the new accounting standard is not totally aligned with the existing auditing standards, and the independent auditor must address whether it is appropriate to add an emphasis paragraph to the audit report regarding going concern. The PCAOB and the AI CPA Auditing Standards Board (ASB) both have projects on their agendas that have the potential to address disclosure differences and related auditor report issues before the effective date. This article highlights several major differences between the accounting standard and existing auditing guidance.

Overview of ASU 2014-15

ASU 2014-15 includes a decision flowchart that provides a high-level overview of amendments to the ASC made by the new guidance on going concern. As indicated earlier, this standard provides guidance to management-not auditors.

The initial step in the process is for management to ensure that the entity is not operating within the scope of ASU 2013-07, Presentation of Financial Statements: Liquidation Basis of Accounting. Per ASU 2013-07, once liquidation is deemed "imminent," an entity must adopt the liquidation basis of accounting. An entity would be operating within the scope of ASU 201307, for example, if a plan of liquidation has already^ been approved by the board of directors of the entity and the probability is remote that the entity will return from liquidation. Hence, once an entity has adopted the liquidation basis of accounting, going concern is no longer at issue.

Assuming that liquidation is not imminent, ASU 2014-15 mandates that management ask 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 financial statements are issued. An affirmative answer to this question triggers the requirement for disclosures. The specific disclosures needed are a function of whether management's plans to mitigate the conditions or events that raise substantial doubt will alleviate substantial doubt. Management must ask two questions concerning their plans:

* Is it probable that plans will be effectively implemented within the assessment period?

* Is it probable that plans will mitigate the relevant conditions or events that raise substantial doubt within the assessment period?

An affirmative answer to both of these questions with an overall assessment that substantial doubt is alleviated would require management to provide note disclosure of the challenges the entity faced before consideration of management's plans, their evaluation of the significance of said challenges, and their plans that alleviate substantial doubt. …

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