Going Concern Assessment and Disclosure Responsibilities
The going concern assessment was recently revisited by regulators. But why? Well, they were concerned about having no required disclosures or early warning system in place to alert investors and other users of the financial statements to the fact that the company (or its auditors) had concerns about the company’s ability to continue as a going concern.
What is going concern?
Under U.S. GAAP, it is presumed that a company will continue as a going concern unless and until a company’s liquidation becomes imminent. To continue as a going concern means that the company will be able to continue operating for a period of time sufficient to carry out its commitments, obligations, etc. Said another way, a company will not have to liquidate in the foreseeable future. As long as it can be presumed that it will continue as a going concern, a company continues to prepare its financial statements in accordance with U.S. GAAP. If liquidation ever becomes imminent, a company should then prepare its financial statements under the liquidation basis of accounting.
The concern about going concern
As noted above, the overall lack of required disclosures and the fluidity of reporting concerned regulators. Financial statements could be reported under traditional U.S. GAAP one period and then the liquidation basis of accounting could be used the next period. And the only existing guidance was SEC guidance, which discussed what the SEC would expect to see disclosed should an auditor’s report include an explanatory paragraph about the auditor’s substantial doubt about a company’s ability to continue as a going concern.
Another area of concern, was that there was no explicit requirement for preparers of financial statements to assess their own ability to continue as a going concern. The ownership for that evaluation rested with the auditors under either PCAOB or AICPA auditing standards. If users of financial statements wanted to see more information regarding this crucial piece of information, they would need to read the auditor’s report and look for an explanatory paragraph.
Revised disclosures
In response to these concerns the FASB amended ASC 205, Presentation of Financial Statements, specifically ASC 205-40. As a result, company management is required to assess whether there are conditions that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This assessment should be made each annual and interim reporting period. If there is substantial doubt, ASC 205-40 provides the required disclosures, which vary depending on whether management has a plan to mitigate the doubt and whether or not the successful implementation of that plan is probable.
Substantial doubt exists when relevant conditions and events indicate that it is probable that the company will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.
Substantial doubt
If there is substantial doubt about the company’s ability to continue as a going concern, management must next consider if there is a plan in place intended to mitigate the adverse conditions or events. If it is probable that management’s plan will be effectively implemented and it is probable that management’s plan will mitigate the conditions that raise the substantial doubt about the company’s ability to continue as a going concern, the company must disclose the following:
- The principal conditions or events that raised substantial doubt, before consideration of management’s plans,
- Management’s evaluation of the significance of those conditions or events; and
- Management’s plans that alleviated the substantial doubt.
If it is not probable that management will be able to effectively implement its plan or if it is not probable that the plan will mitigate the relevant conditions that gave rise to the substantial doubt, the company should also disclose a statement indicating that there is substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
Going concern considerations for the auditor
In response to this revised guidance, the PCAOB issued Staff Audit Practice Alert (SAPA) 13, Matters Related to The Auditor’s Consideration of A Company’s Ability to Continue as A Going Concern. SAPA 13 reminds auditors to continue to follow the existing PCAOB guidance when considering a company’s ability to continue as a going concern. It also points auditors to the appropriate framework (U.S. GAAP or IFRS) when assessing management’s evaluation and disclosures.
As a reminder, the PCAOB requires that, for the auditor’s report, the auditor consider the company’s ability to continue as a going concern for a period of one year from the balance sheet date, which now aligns with the guidance requiring management’s evaluation to be for the one year period from the issuance of the financial statements.
For non-PCAOB audits, the AICPA’s Auditing Standards Board (ASB) issued Statement on Auditing Standards No. 132 (SAS 132) to better align with the revised U.S. GAAP guidance. SAS 132 now requires auditors to separately conclude on management’s assessment of their ability to continue as a going concern and the auditor’s assessment of the company’s ability to continue as a going concern, including gathering appropriate evidence to evaluate management’s plans to alleviate substantial doubt.
If you’ like to learn more about going concern disclosure requirements, check out our eLearning course, which discusses accounting and auditor considerations!
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
