1. MHMMessenger TM Mayer Hoffman McCann P.C. An Independent CPA
Firm A publication of the Professional Standards Group In the past
week, the Financial Accounting Standards Board issued a new
standard that requires management to evaluate whether substantial
doubt exists that an entity will be able to continue as a going
concern. Accounting Standards Update 2014-15, Disclosure of
Uncertainties about an Entitys Ability to Continue as a Going
Concern (ASU 2014-15 or the standard) defines, for the first time
in US GAAP, the key terminology and responsibilities of management
related to an entitys ability to continue as a going concern. The
standard is expected to decrease the diversity of practice that
exists today in the evaluation of the ability for an entity to
continue as a going concern and create some consistencies between
the requirements of US GAAP and requirements of the Securities and
Exchange Commission. Basic Requirements Management will now be
required to assess whether substantial doubt about an entitys
ability to continue as a going concern exists. The primary
consideration to establish whether substantial doubt exists is to
evaluate in aggregate whether conditions and events indicate that
it is probable an entity will not be able to meet its obligations
when they come due. The assessment is limited to the one-year
period after the our roots run deepTM financial statements are
either issued or are available to be issued when applicable (for a
private company, generally one year from the auditor or accountants
report date). The initial evaluation does not consider managements
plans that may mitigate the substantial doubt. After establishing
that substantial doubt exists, managements plans for the one-year
period are evaluated to determine whether it is probable the plans
will be effectively implemented and, if so, if it is probable the
plans will mitigate the conditions and events that created the
substantial doubt. Probable A critical threshold within the
standard is the term probable. Disclosure Requirements If
substantial doubt is determined to exist and managements plans are
found to 1) probably be implemented and 2) probably be effective at
mitigating the substantial doubt, then an entity discloses: 1. The
principal conditions or events that raised the substantial doubt
about the entitys ability to continue as a going concern, 2014
Mayer Hoffman McCann P.C. 877-887-1090 www.mhmcpa.com All rights
reserved. September 2014 The FASB Asks: Will your Entity Continue
as a Going Concern? Probable is used in the same context as it is
currently used in relation to assessing contingencies, and is
generally interpreted as 70-75% chance of an event occurring.
2. MHMMessenger 2. Managements evaluation of the significance
of those conditions or events in relation to the entitys ability to
meet its obligations, and 3. Managements plans that alleviated
substantial doubt about the entitys ability to continue as a going
concern. If managements plans are determined to 1) not be probable
of being effectively implemented or 2) probably not be effective at
mitigating the substantial doubt, then the following disclosures
are included in the financial statements: 1. A statement that there
is substantial doubt that the entity will be able to continue as a
going concern, 2. Principal conditions or events that raise
substantial doubt about the entitys ability to continue as a going
concern, 3. Managements evaluation of the significance of those
conditions or events in relation to the entitys ability to meet its
obligations, and 4. Managements plans that are intended to mitigate
the conditions or events that raise substantial doubt about the
entitys ability to continue as a going concern. In subsequent
years, if substantial doubt continues to exist, updates to the
disclosure are required to be made including descriptions of how
conditions and plans have changed from year to year. Once the
substantial doubt is removed, an explanation for what caused the
substantial doubt to be removed is included in the disclosure.
Changes in Practice The inclusion of these requirements in US GAAP
will have an impact on the preparation of virtually all entities
financial statements. The management of many entities have not
previously evaluated the ability to continue as a going concern;
instead the issue was addressed through the audit due to the
auditors requirement to assess an entitys ability to continue as a
going concern for one year after the balance sheet date. The new
guidance will require management to make this assessment and
requires the assessment to be done for a period that extends beyond
the requirements under the auditing standards. In addition,
disclosure will now be required even when managements plans
alleviate the substantial doubt. Effective Date The standard is
effective for all entities beginning with annual periods ending
after December 15, 2016 (the December 31, 2016 financial statements
for a calendar year-end entity). The evaluation and disclosure
requirement applies to interim financial statements issued after
the first annual period the standard is effective. Early adoption
is permitted. For More Information If you have any specific
questions, comments or concerns, please share them with Ernie Baugh
or James Comito of MHMs Professional Standards Group or your MHM
service professional. You can reach Ernie at [email protected] or
423.870.0511 and James at [email protected] or 858.795.2029. The
information in this MHM Messenger is a brief summary and may not
include all the details relevant to your situation. 2014 Mayer
Hoffman McCann P.C. 877-887-1090 www.mhmcpa.com All rights
reserved. 2 Please contact your MHM auditor to further discuss the
impact on your audit or audit report.