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Going Concern Guidance Published

The FASB issued a standard on going concern that puts the responsibility to decide if a company is able to continue as a going concern from the auditor to management. The standard requires management to decide whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The FASB issued on August 27, 2014, Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.

The standard is intended to define management’s responsibility to decide whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.

Currently, the call to cast doubts about a business’s ability to continue as a going concern—the underlying assumption of financial reporting—belongs to the external auditor. Critics say this call often comes too late, when a business is well on its way to collapse.

The standard requires management to decide whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, or within one year after the date that the financial statements are available to be issued.

The standard provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations in the footnotes.

“This Update responds to stakeholder concerns about the diversity that currently exists in footnote disclosures because of the lack of guidance in GAAP and the differing views in practice about when substantial doubt exists,” FASB Technical Director Susan Cosper said in a statement. “It improves the comparability of these disclosures by providing guidance on when there is substantial doubt and how the underlying conditions and events should be disclosed in the footnotes.”

The standard requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards.

Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued or at the date that the financial statements are available to be issued.

In addition, the standard provides principles for considering the mitigating effect of management’s plans and requires certain disclosures when substantial doubt is relieved as a result of consideration of management’s plans.

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt.

The mitigating effect of management’s plans should be considered only if it is probable that the plans will be effectively put in place and; if so, it is probable that the plans will relieve the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

The standard applies to all companies and not-for-profit organizations. They become effective in the annual period ending after December 15, 2016, with early application permitted.

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