The (FASB) issued final guidance that requires management to evaluate conditions or events that raise substantial doubt about an organization’s ability to continue as a going concern. Substantial doubt exists when it is probable that the organization will be unable to meet its obligations as they become due within one year after the date the financial statements are available to be issued. This evaluation is required for both interim and annual reporting. This change may significantly increase the frequency of going concern emphasis in auditor’s reports.
When management identifies these conditions or events, management should evaluate whether its plans to mitigate the conditions and events will remove the substantial doubt. Management plans should be considered only if it is probable that the plans will be effectively implemented and the plans will mitigate the conditions or events that raise substantial doubt.
In that case management will need to disclose the following information:
- Principal conditions or events that raised substantial doubt
- Managements evaluation of their significance in relation to the organization’s ability to meet its obligations
- Plans that alleviated the substantial doubt
Similar disclosure is required in those instances where management concludes that substantial doubt still exists.
Prior to this new FASB guidance, there was no guidance within accounting principles generally accepted in the United States of America (GAAP) about management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern or to provide related disclosures in financial statements. The only guidance for private companies and not-for-profit organizations was contained in U.S. Auditing Standards issued by the American Institute of Certified Public Accountants (AICPA). That guidance required auditors to evaluate whether there is substantial doubt about an organization’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. In effect, auditors could delay issuance of their report on the financial statements for a year and avoid including going concern language in the audit report. For example, the auditors for an organization with a December 31, 2013 year end could delay the issuance of an audit report on its financial statements until January 2015 and the auditors would not have to address any going concern issues. This option is no longer available under the new FASB guidance, which requires the evaluation to be made on a forward looking basis for a one year period from the date the financial statements are available to be issued. That date would be based on when the financial statements and audit have been completed. This change will require auditors to evaluate management plans more critically, since the alternative of delaying the issuance of the audit report on the financial statements will no longer be available.
The new standard becomes effective for annual ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016.