A new FASB standard should diminish the current diversity in disclosures regarding substantial doubt about an entity’s ability to continue as a going concern, which has been caused, in part, by the absence of any GAAP in this area. On August 27, the FASB issued Accounting Standards Update No. 2014-15, which requires management to determine whether there is a substantial doubt about the company’s ability to continue as a going concern. The update differs from the current applicable requirements in auditing standards and SEC guidance by

• defining “substantial doubt”;
• requiring the management going concern assessment every interim and annual period;
• providing guidance for considering management’s plans to alleviate the doubt;
• requiring certain disclosures when those plans do alleviate the going concern doubt;
• requiring an express statement about the substantial doubt and certain disclosures when the plans do not alleviate the going concern doubt; and
• requiring an assessment of substantial doubt for one year after the date that the financial statements are issued.

The update defines “substantial doubt” as existing when, based on all known and reasonably knowable conditions and events, “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.” The term “probable” means that the event is likely to occur, which is the meaning of “probable” in the FASB’s guidance for loss contingencies.

When management concludes that a substantial doubt exists, it may then consider whether it has plans that will alleviate the substantial doubt. To be considered, plans must have been approved by management or the board, it must be probable that the plans will be effectively implemented, and it must be probable that the plans, when implemented, will mitigate the relevant conditions or events that raised the substantial doubt about an entity’s ability to continue as a going concern.

If management concludes that its plans alleviate the substantial doubt, it must disclose the following in the footnotes:

• The principal conditions or events that gave rise to its substantial doubt
• Its evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
• Its plans that alleviated the substantial doubt

If management continues to have substantial doubt about the entity’s ability to continue as a going concern, it must expressly disclose in the footnotes its substantial doubt as well as the following:

• The principal conditions or events that gave rise to its substantial doubt
• Its evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
• Its plans that are intended to mitigate the conditions or events that raise the substantial doubt

The new FASB standard will be effective for fiscal years ending after December 15, 2016, with early application permitted. The PCAOB will likely change the applicable auditing standard to take into account the new FASB standard.