Note: Jennifer Louis, CPA, founder of Emergent Solutions Group, LLC, has returned as a thought leader for the Business Learning Institute and has written the following article. A webcast related to this article will soon be available through the BLI catalog. See Jennifer’s extensive course listing here.
Even if your financial statements are not audited, basic fair presentation principles require complete and informative disclosures. This would inherently include any significant uncertainties, just like you would disclose uncertainties such as possible lawsuit losses or other contingencies. Providing useful information to enable financial statement users to make informed economic decisions is important, under any applicable financial reporting framework.
Being a “rules-based” society, U.S. financial statement preparers often fall back on applying only what is explicitly stated in the accounting standards. If the rule doesn’t say that I must have a disclosure, then I am not going to offer a disclosure unless someone makes me.
That is exactly why FASB felt the need to create a rule to make financial statement preparers do what they should have been doing by principle all along. ASU 2014-15, “Presentation of Financial Statements – Going Concern,” is officially effective for periods ending after Dec. 15, 2016. Even an entity that merely has a compilation or review, or simply prepares financial statements for third-party use with no attest report attached, must consider whether there is substantial doubt about going concern that merits discussion in the footnotes in order to not be misleading.
What if your organization uses a special purpose framework to prepare the financial statements, like cash-basis or income tax-basis of accounting? Does this get you off the hook for having going concern disclosures?
Unfortunately, no. The same principle of complete and informative disclosure applies, assuming you are providing full-disclosure financial information.
Do the right thing when creating fair presentation financial statements. If there is substantial doubt about your entity’s ability to continue as a going concern for a reasonable period of time, adequately address that circumstance in your disclosures to financial statement users – with a description of your plans and intentions for remediating the risk.