The COVID-19 pandemic has greatly affected many businesses in the United States and across the globe. From shoring up cash and liquidity to navigating complex government support programs to revising operations, companies are facing numerous situations that require greater financial self-scrutiny.
In effect since 2017, Accounting Standards Update (ASU) 2014-15, “Presentation of Financial Statements, Going Concern Subtopic 205-40,” (ASC 205-40) needs to be given greater attention in this current economic climate. ASU 2014-15 requires management to alert financial statement users about uncertainties surrounding an entity’s ability to continue as a going concern. Before this standard went into effect, an entity’s independent auditors were already required to assess a company’s ability to continue as a going concern under the audit standards. The auditor’s responsibility has not changed as a result of ASU 2014-15.
It’s now more important than ever that management pay close attention to its going concern assessment. COVID-19-related economic events have raised “substantial doubts” about many companies’ abilities to survive.
5 critical elements of ASU 2014-15
This article summarizes the key elements of ASU 2014-15 for management to consider in making its assessment of going concern as required by ASU 2014-15. These key elements include:
- “Substantial doubt”
- Frequency of management’s assessment
- Important dates
- Step one: Management’s assessment of whether substantial doubt is raised
- Step two: Management’s assessment of whether substantial doubt exists
According to ASC 205, “Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that 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 within one year after the date that the financial statements are available to be issued when applicable). The term probable is used consistently with its use in Topic 450 on contingencies.” Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained.
Frequency of management’s assessment
An evaluation of an entity’s ability to continue as a going concern is required each reporting period, both at interim and annual reporting periods. If reporting is more frequent than annually, management should update the assessment from the previous reporting period based on new or updated information. Economic conditions are changing continually because of COVID-19, so the extent of the updates required will vary, depending on the entity or its industry.
The following diagram illustrates the dates management should be aware of when assessing going concern: