What Management Should Be Doing Now to Prepare for the Application of ASU 2014-15
On August 27, 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to incorporate the analysis of an entity’s ability to continue as a going concern into accounting guidance. As a result, management is required to assess the entity’s ability to continue as a going concern within one year of the date the financial statements are issued. Additionally, an entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern, even if that doubt is alleviated by management’s plans. Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern and the requirement to perform a going concern evaluation existed only in auditing standards.
What does this standard change?
The time horizon for the going-concern analysis and responsibility for the going-concern analysis change under this ASU. Auditing guidance requires that the analysis cover one year from the balance sheet date, while this ASU requires management’s assessment to cover one year from financial statement issuance date. For each annual and interim reporting period, management is required to evaluate whether there are conditions that give rise to substantial doubt within one year from the financial statement issuance date and, if so, provide related disclosures.
What is the new requirement?
In order to alleviate doubt about the entity’s ability to continue as a going concern, management should consider information about the following conditions, among others, as of the financial statement issuance date: current liquid resources (such as cash), obligations due in the next twelve months, funds necessary for operations, and availability of financing. Whether detailed prospective financial information (for example, forecasted cash flows or covenant calculations) will have to be prepared to assess whether substantial doubt exists at the financial statement issuance date will depend on the circumstances for each company. If conditions give rise to substantial doubt in the initial assessment, management should assess whether its plans will alleviate substantial doubt. Generally, to be able to determine that these plans alleviate substantial doubt, management (or others with the appropriate authority, such as the board of directors) must have approved the plan before the issuance date. For example, an entity may need to obtain debt covenant waivers or additional debt or equity financing in order to sustain the entity for twelve months from financial statement issuance. If management concludes that the initially identified substantial doubt is alleviated by its plans, the standard requires certain disclosures about the underlying conditions and management’s plans. If management concludes the substantial doubt is not alleviated, the standard requires disclosures to include an express statement that there is substantial doubt about the company’s ability to continue as a concern. No disclosures are required specific to going-concern uncertainties if an assessment of the conditions does not give rise to substantial doubt.
When is it effective?
The guidance in this ASU applies to all companies and is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. For calendar year-end companies this means the 2016 annual financial statements or 10-K will need to include management’s assessment and any required disclosures. Earlier application is permitted.
We recommend that management begin analyzing financial results and activities proactively during 2016 in order to be ready for the application of this standard. As a part of the analysis, consider what changes may be necessary to the annual financial statements as a result of management’s assessment, whether management’s plans may alleviate any substantial doubt, and ensure those plans are put in place before the financial statement issuance date in 2017.