Reminder: Management is responsible for going-concern assessments

Reminder: Management is responsible for going-concern assessments

Going-concern issues are in the spotlight during the COVID-19 crisis. Under U.S. Generally Accepted Accounting Principles (GAAP), management, not auditors, is responsible for stating whether there’s substantial doubt about a company’s ability to continue as a going concern. Some Private Company Council (PCC) members recently asked the Financial Accounting Standards Board (FASB) to issue guidelines to bring awareness to the three-year-old rules that address this matter.

Assessing long-term viability

Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, took effect in 2017. Each reporting period, the rules require management to evaluate whether it’s probable that the company won’t be able to meet its financial obligations as they become due, and to provide related footnote disclosures.

Management’s evaluation should be based on qualitative and quantitative information about relevant conditions and events that are known (or reasonably knowable) at the time the evaluation is made. Examples of conditions that may raise a red flag include:

  • A reduction in sales due to store closures,
  • A shortage of products and supplies,
  • A decline in value of assets,
  • Work stoppages,
  • Loan defaults and debt restructuring, and
  • An uninsured or underinsured catastrophe.

Many companies are experiencing one or more of these conditions during the pandemic. If management concludes that there’s substantial doubt about the entity’s ability to continue as a going concern, it must consider whether mitigation plans can be effectively implemented within the one-year look-forward period to alleviate the going-concern issues.

The forecasts and projections required by the rules are especially meaningful as companies navigate work burdens amid the pandemic. Though COVID-19-related work restrictions have been somewhat lifted in some areas, there’s still a level of uncertainty in the marketplace, which makes going-concern judgments even more critical.

Creating awareness

During a PCC meeting on June 25, auditors expressed frustration about a lack of awareness about the current going-concern rules. In response, some PCC members asked the FASB to create nonauthoritative educational materials to inform management and owners of their responsibilities.

However, the FASB hasn’t yet signaled an appetite for providing guidance on the subject. FASB member Harold Schroeder suggested that auditors could raise the topic in every engagement letter to provide awareness, pointing out that this would hold more weight with a client than a FASB document.

Investors and lenders on the PCC also didn’t push for an educational document. Instead, they said financial statement users are more interested in the quality of the information that’s being provided and consistency in the way the numbers are being put together.

“We will look at the numbers and come to our own conclusions based on some reasonably consistent set of standards,” said Dev Strischek, retired senior vice president and senior credit policy officer, corporate risk management at SunTrust Banks.

Making the call

The continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern. Today’s uncertain conditions create challenges when evaluating a company’s long-term viability. For more information about the going-concern assessment, contact your trusted Hood & Strong advisor.