Last week the AICPA’s Auditing Standards Board (ASB) released its exposure draft entitled “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.” This proposed standard is designed to supersede SAS No. 126 (AU-C 570). So, what should we learn from it?
To begin, the ASB made it clear that it wants to achieve three main goals with the exposure draft. First, the ASB wishes to provide interpretative guidance on key aspects of the going concern assumption. This interpretative guidance is, in part, designed to incorporate into the auditing standards the FASB’s ASU No. 2014-15 on going concern issued in 2014. Second, the ASB wishes to converge the U.S. GAAS auditing standard on going concern (currently SAS No. 126) with International Standard on Auditing (ISA) No. 570 (revised). And third, the ASB has designed this exposure draft to apply to different financial accounting standards, thereby necessitating a going concern standard written in a neutral accounting framework manner.
While the implications of this exposure draft may be varied depending on the circumstances in which it may be applied, I wish to focus today’s post on one aspect of this exposure draft–that of the definition of “substantial doubt.”
Substantial doubt
Paragraph A4 to this exposure draft reads:
A4. The FASB standards define substantial doubt about an entity’s ability to continue as a going concern as follows:
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 financial statements are available to be issued when applicable). The term probable is used consistently with its use in topic 450 on contingencies.
Other applicable financial reporting frameworks may use different terms that are similar to substantial doubt. For example, International Financial Reporting Standards (IFRS) use the terms material uncertainty and significant doubt. Also, other applicable financial reporting frameworks may not use probable as their threshold. For example, IFRS uses “may cast significant doubt on the entity’s ability to continue as a going concern.” This SAS uses the terminology of the FASB standards and GASB statements; if an audit is performed under another financial reporting framework, the requirements and application guidance may need to be adapted as necessary. (emphasis added)
Clarification
Since the issuance of ASU No. 2014-15 there has been a disconnect in terms of the above definition of “substantial doubt” between U.S. accounting standards and U.S. auditing standards, which I discussed in a previous post. In fact, this disconnect became a hot topic in one of my former consulting engagements of a Fortune 1000 company. However, with the expectation that this definition will find its way in a new auditing standard on going concern, we should see agreement between these two sets of standards. If adopted, the exposure draft will be effective for audits of financial statements for periods ending on or after December 15, 2017.
I find this a big step in the right direction to clarify auditing standards on this point. Should practitioners take interest in this topic and wish to provide feedback to the ASB, comments are due on September 5, 2016.
