The one constant in accounting, whether financial or tax, is change and 2014 followed suit. In the financial accounting realm, the Financial Accounting Standards Board (FASB) issued 18 updates to its Codification during 2014. While the majority of these may not be applicable to many entities, one that is applicable to a significant number of both for-profit companies and nonprofit organizations is Update 2014-15, related to going concern.
Under generally accepted accounting principles, financial statements are prepared under the presumption that the reporting entity will continue as a going concern. This places a responsibility on independent accountants and auditors to judgmentally determine viability of an entity for a certain period of time into the future. In light of difficult economic conditions over the past five to ten years, as well as inconsistency in application of existing guidance which was considered by practitioners to be not specific enough, the concept of going concern has come under increased scrutiny. FASB Update 2014-15 attempts to address this and provides several significant changes to the existing guidance. While this update is not effective until periods ending after December 15, 2016, it’s not too early for independent CPAs and organizational management to begin considering the impact. Following are the key provisions that differ from current practice:
- Management will be charged with responsibility to evaluate an entity’s ability to continue as a going concern. Currently, this responsibility generally falls to the independent CPA as part of a compilation, review, or audit engagement. Under the new standard, management must perform this evaluation every reporting period.
- The evaluation period to consider will be one year from the date the financial statements are available to be issued, which typically is the date of the compilation, review, or audit report. The current standard specifies one year from the balance sheet date. Thus, the new standard increases the period of time for which independent CPAs and management are taking responsibility.
- Disclosure of substantial doubt about ability to continue as a going concern will be more frequent. The new standard requires disclosure whenever consideration is given to the ability to continue as a going concern, even if substantial doubt has been mitigated. Substantial doubt will be defined as being probably that an entity will be unable to meet its obligations within one year of the financial statement issuance date. Currently, when substantial doubt is mitigated, disclosure in the financial statements is not required.
Please contact our office with any questions about this upcoming change and how it will affect your entity.
ABOUT THE AUTHOR
Brian W. Rosenberg, CPA
Brian has over 15 years of public accounting experience and specializes in providing accounting and auditing services to companies in a variety of industries. His responsibilities include planning, performing, and supervising audits, reviews, and compilations and presenting results to owners and audit committees.