Under generally accepted accounting principles (GAAP), the assumption that a company will be able to continue its operations is presumed as the basis for preparing financial statements. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. However, there may be conditions or events that raise substantial doubt about the company’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but a determination needs to be made on whether to disclose information about the relevant conditions and events.
Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. U.S. auditing standards currently require auditors to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited. That has changed with a recent pronouncement issued by the Financial Accounting Standards Board (FASB). Here are two key changes that companies should be made aware:
Look forward period: Previous analysis had to consider the company’s ability to continue operations through one year from the financial statement date. For example, if your company had a calendar year end December 31, 2015, the analysis would consider operations through December 31, 2016. Under the new guidance, consideration of the entity’s ability to continue as a going concern is one year from the financial statement issuance date. If the 2015 financial statements weren’t issued until October 2016, the consideration now has to extend through October 2017.
Management’s responsibility: Management (not the auditor) is now required to evaluate whether it is probable that the entity will not be able to meet its obligations as they become due within one year after the date the financial statements are issued and present the external accountants their analysis at each annual (or interim) reporting period. Similar to current standards, disclosures will be required to discuss the conditions or events that raise substantial doubt, management’s evaluation of these events, and management’s plan to alleviate the substantial doubt.
New going concern rules are effective for periods ending after December 15, 2016. Please contact Brandi DiGiorgio or your MarksNelson advisor at 816-743-7700 is you have any questions or would like more information.