ASU 2014-15: Management’s Going Concern Responsibilities

In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, which placed the responsibility for evaluating a company’s ability to operate as a “going concern” on its management. Previously, this assessment was a task implicitly handled by external auditors during their audit process. The standard was created to reduce diversity in how and when companies disclosed potential issues about their ongoing operations. It provides a clear framework for management to follow, dictating when the evaluation must occur and what must be disclosed based on the outcome.

Management’s Evaluation Responsibility

ASU 2014-15 requires a company’s management to perform an evaluation of its ability to continue as a going concern for each annual and interim financial reporting period. This ensures the assessment is an ongoing process. The evaluation must look forward for a period of one year after the date the financial statements are issued or are available to be issued.

In performing this evaluation, management must consider all available information about the future, including a broad range of quantitative and qualitative factors. Management must analyze its current financial condition, including its liquidity position and capital resources. This involves reviewing its obligations that will become due within the one-year assessment period and its ability to generate the cash to meet them.

The analysis extends to the company’s projected cash flows from operations and potential external sources of funding. This could include the likelihood of obtaining new financing, refinancing existing debt, or securing additional capital from owners.

Identifying Substantial Doubt

The standard introduces the threshold of “substantial doubt.” Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is “probable” the entity will be unable to meet its obligations as they become due within one year. The term “probable” means the future event is likely to occur, which sets a defined bar for triggering disclosures.

A wide array of negative conditions and events can point toward substantial doubt. Examples include significant negative financial trends, such as recurring operating losses, working capital deficiencies, or negative cash flows from operating activities. The inability to meet debt covenants or the denial of trade credit from suppliers are also strong indicators.

Other events can also signal trouble, such as pending legal proceedings that could have an adverse effect on the company’s ability to operate. The loss of a principal customer, a key franchise, or a patented technology could impact future revenues. These conditions must be evaluated together to determine if they create a probable risk.

Considering Management’s Mitigation Plans

If management concludes that a substantial doubt exists, it must then consider its plans to mitigate the adverse conditions. For a mitigation plan to be factored into the assessment, two conditions must be met. First, it must be probable that the plan will be effectively implemented within the one-year assessment period. Second, it must be probable that the implemented plan will successfully mitigate the conditions that raised the substantial doubt.

Common mitigation plans include strategies to increase cash inflows or reduce cash outflows. Examples include:

• Disposing of a non-essential asset or business segment.
• Borrowing money through new arrangements or restructuring existing debt.
• Reducing or delaying expenditures, such as discretionary spending or capital projects.
• Seeking additional capital contributions from owners.

Required Financial Statement Disclosures

The required disclosures in the financial statement footnotes depend on the conclusions reached after considering management’s mitigation plans. The standard creates two disclosure paths based on whether the substantial doubt was alleviated.

Substantial Doubt Alleviated

If management’s plans are probable to be implemented and effective, thus alleviating the substantial doubt, certain disclosures are still required. The financial statement footnotes must describe the principal conditions that initially raised the doubt. The company must also disclose its evaluation of those conditions and the mitigation plans that successfully alleviated the doubt.

Substantial Doubt Not Alleviated

If substantial doubt still exists after considering management’s plans, more extensive disclosures are required. The company must explicitly state in the financial statement footnotes that there is substantial doubt about its ability to continue as a going concern.

In addition to this statement, the company must describe the principal conditions causing the uncertainty. It must also disclose management’s evaluation of them and its plans intended to mitigate them, even if those plans were not sufficient to fully alleviate the substantial doubt.