Course Name: Going Concern Assessment It s Your Responsibility Now, Management Speaker: Kathy Schrock, The CFO Suite LLC Course Description: This presentation will cover key provisions and terminology of FASB ASU 2014-15, Presentation of Financial Statements Going Concern. This new standard requires management to perform a going concern evaluation for all interim and annual financial statement reporting periods and determine appropriate disclosures. The material will provide an overview of key provisions, terminology, examples of conditions and considerations for management s evaluation and disclosure requirements. Learning Objectives: After this presentation, participants will be able to: Identify key terms used in the standard, who is affected, and the frequency of the evaluation; Discuss how management performs the evaluation; Identify examples of matters, conditions or events that give rise to going concern; Identify required disclosures; and Describe differences between management s assessment under this standard and the auditor s assessment under auditing standards. Category: Prerequisites: Technical None
Going Concern Assessment - It's Your Responsibility Now, Management Dallas CPA Society Convergence 2017
FASB ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) Management of all entities required to evaluate whether there are conditions and events that raise substantial doubt about the ability to continue as a going concern Evaluation required for annual and interim periods after December 15, 2016 Disclosure required if management concludes substantial doubt exists (additional related to management plans) Similar to the one auditors perform - does not replace
Learning Objectives After this presentation, participants will be able to: Identify key terms used, effective date, frequency and who is affected Discuss management responsibilities under the standard Identify examples of matters, conditions or events that give rise to going concern Identify required disclosures
Agenda Who Why When What How
Who Management of all public and private entities
Why Going concern presumption critical to financial statement measurements and classifications Management is responsible for financial statements and disclosures but no going concern guidance existed in GAAP Align guidance for management with Auditing and SEC requirements for auditors Reduce inconsistency in timing and content of disclosure Improve Financial Reporting for all entities
When Required for all annual and interim reporting periods beginning after December 15, 2017
WHAT
Principles Define substantial doubt Require evaluation every reporting period including interim periods Provide principles for considering the mitigating effect of management plans Require certain disclosures when substantial doubt is alleviated Require an express statement or other disclosure when substantial doubt is not alleviated Require assessment for a period of one year after the financial statement issue or available date
Key Terms Going Concern Substantial Doubt Probable Assessment Period Known or Reasonably Knowable Financial statements Issued Financial Statements available to be issued
Substantial Doubt Substantial doubt about an entity s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that 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 or within one year after the date that the financials statements are AVAILABLE to be issued (when applicable).
Key Terms - continued Probable likely to occur same as topic 450, Contingencies Assessment period (Reasonable period) within one year Financial statements issued widely distributed to shareholders or other users Financial statements available to be issued - complete in form and format in compliance with GAAP and all approvals have been obtained
Liquidation The process by which an entity converts its assets to cash or other assets and settles its obligations with creditors in anticipation of the entity ceasing all activities.
HOW
Steps 1. Determine/Evaluate whether there are conditions/events in the aggregate that raise substantial doubt about going concern within one year after date financial statements are issued or available 2. If substantial doubt is raised consider management plans to mitigate probable that they will effectively be implemented Probable that they will effectively mitigate the conditions/events Determine disclosures
Identify Conditions or Events Relate to the entity s ability to meet its obligations as they become due within one year after the financial statements are issued or available Based on relevant conditions and events known/reasonably knowable at the date the financial statements are issued
Examples of Adverse Conditions 1/4 Negative financial trends Recurring operating losses Working capital deficiencies Negative cash flows from operations Other adverse key financial ratios
Examples of Adverse Conditions 2/4 Other indications of possible financial difficulties Default or restructuring on loans or similar agreements Dividend arrearages Denial of usual trade credit from supplies Need to restructure debe to avoid default Noncompliance with statutory capital requirements Need to seek new sources or methods of financing or dispose of substantial assets
Examples of Adverse Conditions 3/4 Internal matters Work stoppages or other labor difficulties Substantial dependence on the success of a specific project Uneconomic long term commitments Need to significantly revise operations
Examples of Adverse Conditions 4/4 External matters Legal proceedings Legislation or similar matters that might jeopardize the ability to operate Loss of a key franchise, license, patent Loss of a principal customer or supplier Uninsured or underinsured catastrophe including weather related (hurricane, tornado, earthquake, flood)
Examples of Adverse Conditions List is not all-inclusive Existence of one or more not automatically a going concern issue Absence doesn t mean no going concern issue Consider all quantitative and qualitative factors
Quantitative and Qualitative Factors Current financial condition - liquidity sources - available liquid funds, access to credit Conditional and unconditional obligations due or anticipated within one year after issue or available Funds necessary to maintain operations considering current financial condition, obligations or other expected cash flows Other conditions or events when considered in conjunction with above that may adversely affect ability May NOT consider historical successful implementation of plans must consider conditions/events exclusive of any current or historical plans
Management Plans 1/2 Plans to dispose of an asset or business (considerations below) Plans to borrow money or restructure debt Plans to reduce or delay expenditures Plans to increase ownership equity Must consider feasibility of each including applicable restrictions, marketability, availability, etc.
Management Plans 2/2 Only consider information available as of the date the financial statements are issued MUST have both of the following: 1. Probable that they will be effectively implemented within one year Based on feasibility of implementation in light of specific facts and circumstances - generally to be considered probable must have approved the plan before the date the financials were issued 2. Probable that when implemented will mitigate the conditions or events If not probable to be implemented within one year, shall not be considered
Example If doubt is alleviated by plan to restructure debt - must consider Revised agreement would be effective within one year of the issuance of financial statements Terms of the revised agreement (e.g. payment schedule and interest rate alleviate the relevant condition and events (inability to make debt payments) with respect to both amount and timing of payments due
Disclosures Conditions Raise Doubt Plans Alleviate doubt Plans DO NOT Alleviate doubt Conditions or events that raised doubt X X Management Evaluation of the X X Significance Management Plans to alleviate Management Plans intended to mitigate Disclose Substantial Doubt about ability to continue as going concern X X X
Example 1 Relevant Conditions Negative Financial Trends No significant debt coming due within the assessment period Substantial liquid resources (cash and line of credit) Assessment Results Cash flow forecasts demonstrate the company will meet its obligations within the assessment period Management Plans Cost cutting Measures
Example 1 Impact Conditions Raise Substantial Doubt? No is not probable that they will not meet obligations within the next year Alleviated by management plans? N/A no substantial doubt so no going concern issue Going Concern Disclosures? No
Example 2 Relevant Conditions Negative Financial Trends No significant debt coming due within the assessment period Limited liquid resources (cash and line of credit) Assessment Results Cash flow forecasts demonstrate the company will run out of money and it s available LOC within the assessment period Management Plans Sell division XYZ approved by the Board before the issuance date and probable within the assessment period
Example 2 - Impact Conditions Raise Substantial Doubt? Yes probable they will not meet obligations within the next year (excluding management plans) Alleviated by management plans? 1. Probable implemented within the year? Yes 2. Probable when implemented will mitigate the conditions? Yes Going Concern Disclosures? Yes Conditions that raised doubt Management evaluation of significance Management plans that alleviated substantial doubt
Example 3 Relevant Conditions Negative financial trends and limited liquidity Significant debt coming due within the assessment period Does not have ability to repay all debt at maturity Does not have a history of refinancing debt Assessment Results Absent a refinancing, the company will not meet obligations With refinancing, would meet obligations Management Plans Refinance debt
Example 3 - Impact Conditions Raise Substantial Doubt? Yes probable they will not meet obligations within the next year (excluding management plans) Alleviated by management plans? 1. Probable implemented within the year? No negative financial trends and lack of refinancing history, plus no current definable action/commitment 2. Probable when implemented will mitigate the conditions? NA since 1 is No Going Concern Disclosures? Yes Conditions that raised doubt Management evaluation of significance Management plans Substantial doubt about ability to continue as a going concern
Disclosure Continue disclosure in subsequent periods as long as conditions or events continue to raise substantial doubt In the period that substantial doubt no longer exists, disclose how the relevant conditions or events that originally raised substantial doubt have been resolved Disclosures should be more extensive as additional info becomes available Do not confuse extent with length appropriate context and continuity
What are people saying Spectrum used to it, middle (gray), not an issue Unexpected, unprepared - thought auditors would do it or help more Didn t have adequate processes and controls or information systems to properly identify conditions and events More significant undertaking than expected Duplicative with auditors and minimal reliance on management work Surprised by level of disclosure
Learning Objectives After this presentation, participants will be able to: Identify key terms used, effective date, frequency and who is affected Discuss management responsibilities under the standard Identify examples of matters, conditions or events that give rise to going concern Identify required disclosures
Appendix
Characteristic ASC 205-40 IFRS Management is responsible for evaluating and disclosing uncertainties about an entity s ability to continue as a going concern Financial statements prepared on going concern basis unless Definition of substantial doubt Assessment period for considering ability to meet obligations Disclosure Required Yes Unless and until its liquidation becomes imminent, at which time the liquidation basis of accounting applies (in accordance with Subtopic 205-30) Conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued, as applicable Within one year after the date the financial statements are issued or available to be issued, when applicable When management is aware of material uncertainties related to events and conditions that may cast significant doubt about ability to continue as going concern. yes Unless management either intends to liquidate the entity or cease trading [operations], or has no realistic alternative but to do so (paragraph 25 of IAS1, Presentation of Financial Statements). If not on going concern basis, must disclose basis used. No guidance on liquidation Not defined At least one year from balance sheet date (financial statement date), no upper limit When conditions or events exist that raise substantial doubt about ability to continue as a going concern. Disclose: conditions and events and management s evaluation of the significance Disclose management plans Disclose whether plans alleviate If plans don t alleviate, disclose plans to mitigate and express disclosure that there is substantial doubt
GAAP versus Auditor Guidance Characteristic ASC 205-40 PCAOB AS 2415 Definition of substantial doubt Conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued, as Not defined Assessment period for considering ability to meet obligations applicable Within one year after the date the financial statements are issued or available to be issued, when applicable A period not to exceed one year beyond the balance sheet date Evaluation Requirement Annual and interim periods In connection with an audit of the entity s financial statements
Resources http://www.fasb.org/resources/ccurl/599/ 128/ASU%202014-15.pdf Audit firms and others
Kathy Schrock Managing Partner The CFO Suite Kathy Schrock is a managing partner with the CFO Suite LLC, a professional services firm. Formerly the National Leader of Tatum s Internal Control and Risk Solutions Practice and Managing Partner and Sarbanes-Oxley (SOX) Practice Leader with The Controller Group (TCG), her numerous consulting engagements over the years have also included: process improvement, integration support and project management, IPO readiness and purpose, audit preparation, and other accounting and finance and internal audit-related services across multiple industries. Ms. Schrock spent 10 years with the Assurance and Advisory Practice of Ernst & Young (EY) and was instrumental in the firm s education programs. She also served as Director of Planning and Control for the The Associates (now Citigroup) and has industry work experience in technology, health care and real estate. During her tenure at Tatum and TCG, she was recognized as an internal controls and SOX specialist and was a frequent speaker, panelist and contributing writer on the subject. In 2003, Ms. Schrock was named an honoree in the YWCA Tribute to Women in Business.