A going concern is a company that has substantial doubt that it will be able to meet its financial obligations within one year after the date its financial statements are issued. A company that is not a going concern, therefore, has the resources needed to continue operating for the foreseeable future.
Whether an entity is a going concern or not used to be solely covered under auditing standards. However, with the release of Accounting Standards Update (ASU) 2014-15 in August 2014, the concept of going concern is now also within Generally Accepted Accounting Principles (GAAP) standards. (This update is now in effect for annual periods ending after December 15, 2016.) Before this update, auditors were required to assess an entity’s going concern and then inform management of the conclusion. If the entity was a going concern then the appropriate disclosures would be made.
The release of the ASU for going concern requires the entity’s management to assess their ability to continue as a going concern and make the appropriate disclosures on their financial statements. Management needs to evaluate the ability of their company to continue in operations for one year past the date of the financial statements. If management identifies that the company is in trouble, they need to come up with a defined plan to keep the company operational and alleviate the identified troubles to the extent necessary to alleviate the doubt, if possible.
These are the key disclosures management would need to make for its respective entity if the going concern issue is alleviated within one year of the issuance of the financial statements:
- Conditions or events that would make users of the financial statements doubt the entity’s ability to continue as a going concern.
- Management’s evaluation of the significance of the conditions or events that are causing the going concern.
- The plans that alleviated the conditions that caused substantial doubt about the entity’s ability to continue as a going concern.
Here are the key disclosures management would need to make for its respective entity if the going concern is not alleviated within one year of the issuance of the financial statements:
- Conditions or events that would make users of the financial statements doubt the entity’s ability to continue as a going concern.
- Management’s evaluation of the significance of the conditions or events that are causing the going concern.
- The plans that are intended to mitigate the conditions that caused substantial doubt about the entity’s ability to continue as a going concern.
- A statement that there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date.
Overall, the release of (ASU) 2014-15 shifts the primary responsibility for evaluating a going concern from the auditor to management. An auditor may still review the entity’s evaluation; however, the entity now needs to make the assessment. Therefore, it may be important for entities to install a process to evaluate whether conditions exist that raise substantial doubt for the entity to continue as a going concern.
By Dylan Wright, CPA