In brief: FASB introduces going concern assessment and disclosure requirements

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In brief 08/28/2014 by Assurance services
In brief: FASB introduces going concern assessment and disclosure requirements

At a glance

New FASB standard introduces guidance for management to assess and disclose going concern uncertainties.

What happened?

The FASB (the “board”) issued a new standard — Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern — that will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.

The assessment

In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date.

  • Management will consider relevant conditions that are known (and reasonably knowable) at the issuance date.
  • Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date.

The new standard defines substantial doubt and provides example indicators. The definition of substantial doubt incorporates a likelihood threshold of “probable” similar to the current use of that term in U.S. GAAP for loss contingencies.

Required disclosures

Disclosures will be required if conditions give rise to substantial doubt. However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures.

If substantial doubt is alleviated by management’s plans, the following will need to be disclosed:

  • Principle conditions or events that initially gave rise to substantial doubt
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that alleviated substantial doubt

If, on the other hand, the initially-identified substantial doubt is not alleviated by management’s plans, the following will need to be disclosed:

  • A statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the issuance date
  • Principal conditions or events giving rise to substantial doubt
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that are intended to mitigate those conditions or events

The board’s use of “substantial doubt” as the threshold for required disclosures was adopted from current auditing standards. If conditions do not give rise to substantial doubt, no disclosures will be required specific to going concern uncertainties.

Why is this important?

The new standard applies to all entities and provides an explicit requirement for management to assess and disclose going concern uncertainties.

  • Presently, similar disclosures are included in the footnotes of public and nonpublic entities, and in other sections of certain publicly available reports (e.g., MD&A). However, before this new standard, management did not have specific guidance on when and how to assess or disclose going concern uncertainties.
  • Guidance exists in the current U.S. auditing standards which require auditors to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a period of time not to exceed one year from the balance sheet date. Those standards also require auditors to consider the possible financial statement effects including footnote disclosures. However, the auditing standards do not govern management’s footnote disclosures. The new standard provides management its own disclosure guidance.
  • The new standard incorporates and expands upon certain principles that are currently in the auditing standards. Specifically, the new standard defines substantial doubt, requires assessments each annual and interim period, provides an assessment period of one year from the issuance date, and requires disclosures both when substantial doubt is alleviated by management’s plans and when substantial doubt remains unalleviated.

What's next?

The new standard will be effective for all entities in the first annual period ending after December 15, 2016 (December 31, 2016 for calendar year-end entities). Earlier application is permitted.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the Risk Management team in the National Professional Services Group.

Authored by:

Daghan Or
Partner
Phone: 1-973-236-4966
Email: daghan.or@us.pwc.com

Sarah Fitch
Managing Director
Phone: 1-973-236-4404
Email: sarah.fitch@us.pwc.com