When the Going Gets Tough – Management’s Future Role Related to Going Concern

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40). This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. This ASU seeks to reduce diversity in the timing and content of footnote disclosures due to the current lack of guidance in generally accepted accounting principles (GAAP) regarding this matter and the differing views surrounding when there is substantial doubt about an entity’s ability to continue as a going concern. The amendments contained in this ASU apply to all entities.

Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing the financial statements unless and until the entity’s liquidation becomes imminent. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. As defined in the ASU, determining whether there is substantial doubt depends on an assessment of relevant conditions and events, in the aggregate, that indicate it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued, or are available to be issued. The ASU also provides events and related examples that indicate an entity may be unable to meet its obligations, including:

  • “Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios.
  • Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets.
  • Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, and a need to significantly revise operations.
  • External matters, for example, legal proceedings, legislation, or similar matters that might jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.”

For each annual and interim reporting period, an entity’s management should assess its ability to meet its obligations within one year after the date that the financial statements are issued, or are available to be issued.

If management identifies going concern conditions or events, management should consider whether its plans, which are intended to mitigate those relevant conditions or events, will alleviate the substantial doubt. The mitigating effect of these plans shall be considered if it is probable they will be effectively implemented within one year after the date the financial statements are issued, and when implemented, will mitigate the relevant conditions or events. If substantial doubt is alleviated as a result of management’s consideration of these plans, the entity should disclose the following information to the financial statements:

  1. Principle conditions or events.
  2. Management’s evaluation.
  3. Management’s plans that alleviated the substantial doubt.

If substantial doubt is not alleviated, the entity should disclose the information above and also include a statement in the footnotes indicating there is 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 are available to be issued.

Because of the significant judgments involved in management’s going concern evaluation, entities may also need to implement and document the underlying processes and controls.

The amendments in the ASU are effective for the annual period ending after December 16, 2016, and for annual periods and interim periods thereafter, with early application permitted.

If you have any questions about the amendments in this ASU or would like additional information about our audit services, contact the experts listed below at PYA, (800) 270-9629.


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

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