ASU 2014-15 – Going Concern

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU essentially, with some changes, mirrors going concern requirements for auditors currently founding in PCAOB and AICPA standards. Now, management must perform at least annually an evaluation of the entity's ability to continue as a going concern.

Guidance

Management must evaluate, in the aggregate, conditions and events that are known or reasonably knowable at the evaluation date. Management must assess whether it is probable that the entity will be able to meet its obligations that are due within one year after the date that the financial statements are issued or available to be issued. The probability threshold is the same used for accounting for contingencies – more likely than not. When making the assessment, management may consider mitigating plans to determine whether substantial doubt is alleviated. These plans can be considered only if both of the following conditions are met:

• It is probable that the plan will be effectively implemented with the year.
• It is probable that the plan when implemented will mitigate the conditions or events that raise substantial doubt about going concern.

In order for these plans to be considered, generally, management or those with authority must approve the plans before the issuance date of the financial statements.

Disclosure Requirements

If, after considering all the facts and management's plans, management concludes that substantial doubt remains, the financial statements must include a statement that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. The financial statements must also include disclosures that allow users to understand:

• Principal conditions or events that raised substantial doubt,
• Management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations. and
• Management's plans to mitigate the conditions or events.

These disclosures must be made even if management concludes that the substantial doubt has been alleviated.

Implementation Information

ASU 2014-14 is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted.

Comparative Statements

To increase the usefulness of financial statements, many entities include financial statements for one or more prior years in their annual reports. Some also include five- or ten-year summaries of condensed financial information. These comparative financial statements allow investment analysts and other interested readers to perform comparative analysis of pertinent information. ASC 205-10-45-1 explains that the presentation of comparative financial statements in annual reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the enterprise. That presentation emphasizes the fact that the statements for a series of periods are far more significant than those for a single period and that the accounts for one period are but an installment of what is essentially a continuous history.

A full set of financial statements consists of:

1. Financial position at the end of the period
2. Earnings, which may be shown in a separate statement or within one continuous statement of comprehensive income
3. Comprehensive income for the period in one statement or two consecutive statements
4. Cash flows during the period
5. Investments by and distributions to the owners during the period.

Changes Affecting Comparability

ASC 205 emphasizes the principle of comparability. Any exceptions to comparability must be disclosed as described in ASC 205. If because of reclassification or other reasons, the manner of or basis of corresponding items has changed, that change must be explained. To the extent they remain significant, notes to financial statements should be repeated in comparative statements or at least referred to.

Determining when a Component of an Entity Should Be Classified as a Going Concern

The unit of account is a component of an entity or a group of components of an entity. The guidance defines a discontinued operation as a disposal of a component or group of components that

1. Is disposed of, classified as held for sale, or dispose by other than sale (for example by abandonment, exchange, or distribution to owner) and

2. “Represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results.”(ASC 205-20-45-1B)

The guidance goes on to state that a strategic shift could include:

• A major geographical area of operations,
• A major line of business,
• A major equity method investment, or

• Other major parts of an entity.(ASC 205-20-45-1C)

An entity will need to use considerable judgment to determine whether a strategic shift has occurred. The guidance does not define “major' in major strategic shift, but does provide several detailed examples. However, even with reference to the examples, there is a degree of judgment involved in making the determination of whether a major shift has occurred.

The disposal of a component or group of components must be reported in discontinued operations when any of the follow occurs:

1. Management commits to a plan to sell the entity.
2. The entity to be sold is available for immediate sale.
3. The entity has taken action to complete the plan, including a program to find a buyer or other actions.
4. The sale or transfer of the entity to be sold is expected to be recognized as a completed sale within one year, unless events beyond the entity's control occur.
5. The entity to be sold is being actively marketed at a price that is reasonable in relation to its current fair value.
6. Action required to complete the plan to sell make it unlikely that the plan will be withdrawn or changed in any significant way.

   (ASC 205-20-45-1E)

In addition, if a business or nonprofit activity meets these criteria on acquisition, it is a discontinued operation.

For those components that have been disposed of or classified as held for sale and that do not meet the requirements for reporting as discontinued operations, the entity should look to ASC 360-10–45 on long-lived assets classified as held for sale or to be disposed of for guidance.

The new guidance removes the provisions that disallowed presentation as a discontinued operation if:

1. There are operations and cash flows of the component that have not been eliminated from the reporting entity's ongoing operations, or
2. There is a significant continuing involvement with a component after its disposal.

Removal of these provisions should reduce complexity. However, continuing relationships could affect the conclusions as to whether a strategic shift has occurred. FASB avoided using a bright line quantitative threshold measurement like 15–20%.

The new guidance added the held-for-sale criteria and exceptions to the new requirement to complete the sale within the year.

Software Solutions Plus offers four major product lines. It has a children's educational line, a children's game line, a business office line, and a desktop publishing line. The product line is the lowest level at which the operations and cash flows can be clearly distinguished by management. Each line is branded and has distinguishable operations and cash flow. Therefore, each product line includes a group of components of the entity.

Case 1 – Software Solutions Plus decides to shift its strategy and exit the game business and commits to a plan to sell the children's game line. The assets and liabilities of the product line are classified as held-for-sale at that date. Software Solutions Plus has decided that it will not develop any new computer games for the children's market. In this case, the conditions are met to report the children's game line as a discontinued operation.

Case 2 – Instead of exiting the children's game business entirely as in Case 1, Software Solutions Plus decides to keep its game programmers on its staff and have them develop new children's games. However, instead of selling the games to the home market via distributors as it had been doing, each existing and newly developed game will be marketed and sold to other software game companies. Software Solutions Plus will not provide technical support for any particular game software after it is sold. It will continue to have revenues and expenses related to the children's game product line. Thus, management concludes there is not a major strategic shift. The change in the manner of marketing the line cannot be reported in discontinued operations.

Case 3 – Discontinued Product Not a Component of the Entity. Software Solutions Plus decides to discontinue developing and selling its graphics drawing program product, which is part of the desktop publishing product line. In this case, because the graphics drawing program product is not a component of the entity on its own, but instead is part of the component desktop publishing product line, the sale of the graphics drawing program cannot be reported in discontinued operations.

Presentation

Entities must separately present assets and liabilities of a discontinued operation for all comparative periods on the face of the balance sheet. Disposal groups may meet the held-for-sale criteria of a discontinued operation but not meet the definition of a discontinued operation. In those cases, the entity must separately present assets and liabilities on the face of the balance sheet in the period in which the disposal group is classified as held-for-sale and the entity does not have to reclassify previously reported amounts.

The entity must also disclose the major classes of assets and liabilities on the face of the balance sheet or in the notes.

In the period in which a component of an entity is either classified as held-for-sale or has been disposed of, the results of operations of that component are reported as a separate component of income, before extraordinary items and the cumulative effect of accounting changes (if any). Any gain or loss recognized on disposal is reported separately on the face of the income statement or disclosed in the notes. (ASC 205-20-45-3A and B) The income statements of any prior periods being presented should be restated to also reflect the results of operations of the component as discontinued operations. All amounts should be reported less applicable income taxes (benefits), as shown in the example below. If a disposal does not qualify as a discontinued operation, it should be included in income from continuing operations.

The gain or loss is calculated based on guidance in other topics. For example, if the discontinued operation is within the scope of ASC 360, Property, Plant and Equipment, guidance can be found in that topic and in the related chapter in this book.

Allocation of Overhead and Interest to Discontinued Operation

General corporate overhead may not be allocated to discontinued operations (ASC 205-20-45-9). Interest expense, however, is to be allocated to discontinued operations if, as a result of a disposal transaction, the buyer assumes debt of the seller/reporting entity or, as a result of the disposal transaction, the reporting entity is required to repay debt Allocation to discontinued operations of other consolidated interest is permitted but not required (ASC 205-20-45-6 through 8). If the corporation decides to allocate other consolidated interest, ASC 205-20-55 provides guidance regarding the maximum amount and methods of allocation.

Adjustments to Amounts Previously Reported

Circumstances may be such that amounts previously reported in discontinued operations may need to be adjusted in a subsequent period. If so, those adjustments should be presented separately in the discontinued operations section of the income statement. Adjustments may result from such events as resolution of contingencies or settlement of employee benefit plan obligations.