By: George M. Wilson & Carol A. Stacey<\/p>\n
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In our last post, we looked at Sears Holdings\u2019 disclosures about its going concern issues and saw that the company used the language \u201csubstantial doubt exists related to the Company’s ability to continue as a going concern\u201d in the footnotes to their financial statements. We also saw that Sears Holdings\u2019 auditors did not mention this issue in their report.<\/strong><\/p>\n \u00a0<\/strong><\/p>\n While this might seem like a bit of a disconnect, it turns out that there is a gap between the disclosure requirements for companies and the reporting requirements for auditors. (Actually, there are multiple gaps!)<\/p>\n <\/p>\n This post reviews the GAAP requirements of ASU 2015-15, which became effective for companies for years ending after December 15, 2016.<\/p>\n <\/p>\n In the third and last post of this series we will explore the auditor\u2019s reporting requirements and the \u201cgaps\u201d between company requirements and auditor\u2019s requirements.<\/p>\n <\/p>\n Company Requirements<\/u><\/strong><\/p>\n <\/p>\n Here is a brief summary with some excerpts from the requirements for companies in ASC 205-40-50:<\/p>\n In connection with preparing financial statements for each annual and interim reporting period, an entity\u2019s management shall evaluate whether there are conditions and events, considered in the aggregate, that raise\u00a0substantial doubt about an entity\u2019s ability to continue as a\u00a0going\u00a0concern<\/u><\/a> within one year after the date that the\u00a0financial statements are issued<\/u><\/a>\u00a0(or within one year after the date that the\u00a0financial statements are available to be issued<\/u><\/a>\u00a0when applicable).<\/p>\n <\/p>\n \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026..<\/p>\n <\/p>\n Management shall evaluate whether relevant conditions and events, considered in the aggregate, indicate that it is probable that an 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 evaluation initially shall not take into consideration the potential mitigating effect of management\u2019s plans that have not been fully implemented as of the date that the financial statements are issued (for example, plans to raise capital, borrow money, restructure debt, or dispose of an asset that have been approved but that have not been fully implemented as of the date that the financial statements are issued).<\/p>\n <\/p>\n \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026..<\/p>\n <\/p>\n When relevant conditions or events, considered in the aggregate, initially indicate that it is\u00a0probable<\/u><\/a>\u00a0that an entity will be unable to meet its obligations as they become due within one year after the date that the\u00a0financial statements are issued<\/u><\/a>\u00a0(and therefore they raise\u00a0substantial doubt about the entity\u2019s ability to continue as a\u00a0going\u00a0concern<\/u><\/a>), management shall evaluate whether its plans that are intended to mitigate those conditions and events, when implemented, will alleviate substantial doubt about the entity\u2019s ability to continue as a\u00a0going\u00a0concern.<\/p>\n <\/p>\n \u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026..<\/p>\n <\/p>\n With this as the general requirement for an evaluation, the disclosure requirement comes with a binary determination about the impact of management\u2019s plans:<\/p>\n <\/p>\n Disclosures When Substantial Doubt Is Raised but Is Alleviated by Management\u2019s Plans (Substantial Doubt Does Not Exist)<\/strong><\/p>\n <\/p>\n ASC 240-40-50-12<\/p>\n <\/p>\n If, after considering management\u2019s plans, substantial doubt about an entity\u2019s ability to continue as a going concern<\/u><\/a> is alleviated as a result of consideration of management\u2019s plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):<\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n Disclosures When Substantial Doubt Is Raised and Is Not Alleviated (Substantial Doubt Exists)<\/strong><\/p>\n \u00a0<\/strong><\/p>\n ASC 240-40-50-13<\/p>\n <\/p>\n If, after considering management\u2019s plans,\u00a0substantial doubt about an entity\u2019s ability to continue as a\u00a0going\u00a0concern<\/u><\/a>\u00a0is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is substantial doubt about the entity\u2019s ability to continue as a\u00a0going\u00a0concern\u00a0within one year after the date that the\u00a0<\/strong>financial statements are issued<\/u><\/strong><\/a>. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:<\/p>\n <\/p>\n <\/p>\n An interesting difference between these two levels of disclosure is that there is no requirement to use the terminology \u201csubstantial doubt\u201d when management\u2019s plans alleviate the uncertainty.<\/p>\n <\/p>\n The language Sears Holdings used was:<\/p>\n <\/p>\n Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.<\/p>\n <\/p>\n <\/p>\n The company used the term \u201csubstantial doubt\u201d even though they believed their plans mitigated this \u201csubstantial doubt\u201d. Their disclosure went beyond the requirements of the standard.<\/p>\n <\/p>\n In our next post, we will explore how this interacts with GAAS for auditors.<\/p>\n <\/p>\n As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":" By: George M. Wilson & Carol A. Stacey In our last post, we looked at Sears Holdings\u2019 disclosures about its going concern issues and saw that the company used the language \u201csubstantial doubt exists related to the Company’s ability to continue as a going concern\u201d in the footnotes to their financial statements. We also … Continue reading Going Concern Reporting \u2013 The Gap in GAAP Versus GAAS- Part Two<\/span> \n
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