The Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40). ASU 2014-15 is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted.
Part of the fallout of the mid-2000 financial crisis was a perception that financial statements did not provide users with sufficient warning, or warning at all, that institutions were on the verge of collapse. Massive storms were building strength and approaching, yet companies and auditors were not warning investors to run for cover.
Roadmap for Companies
Auditors have historically managed the going concern warning system. The auditors had the responsibility and specific rules to evaluate whether a company was a going concern. Companies had no specific accounting rules to follow in this area. With the release of the ASU, companies now have a roadmap to follow as well as reporting obligations to consider if going concern uncertainties arise. Companies will now be required to consider each annual and interim period whether it will be able to satisfy obligations that come due within one year after financials are issued or are available to be issued.
Early Warning or A Better View
While it certainly appropriate that companies and not just auditors are responsible to assess going concern uncertainties, there are questions whether these rules will achieve the intended goals. Going concern disclosures will be triggered using a “probable” threshold; however, the FASB acknowledged auditors may have used a lower threshold when assessing going concern uncertainties. With perhaps a higher threshold and the negative perception of a going concern disclosure, will this be the answer for users seeking more timely warning of impending disaster.
This rule continues the trend of more forward looking information presented in audited financial statements. Asking management to disclose future events without a safety net and auditors to opine on the future always seem to lead back to less is more.
Time will tell if this change allows financial statement users to see the storms earlier, or merely see the dark clouds better when the storm arrives.