Nonprofit Accounting Basics

Going Concern: What Nonprofit Management Teams Need to Know

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

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Financial reporting issues remain hot topics for those in the nonprofit industry, but one of these issues in particular has historically lacked direction and guidance for for-profit and nonprofit organizations alike: going concern.

To help provide clarity around the issue, the Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) No. 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.

For the sake of background, the principle of going concern is embedded in our conceptual accounting framework. It’s based on the assumption that an organization will remain in operation for the foreseeable (a reasonable time period) future. Conversely, this also means the organization will not be forced to cease its operating and programmatic activities and liquidate its assets in the near term. By making this assumption, management is justified in deferring the recognition of certain expenses until a later period, when the organization will presumably still be operating to achieve its mission and using its assets in the most effective manner possible.

The going concern principle is presumed as the basis for preparing financial statements—unless and until the organization’s liquidation becomes imminent. If and when a nonprofit’s liquidation does become imminent, financial statements should be prepared using the liquidation basis of accounting in accordance with Subtopic 205-30. For years, U.S. auditing standards assisted auditors in evaluating whether there was substantial doubt about an organization’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited. However, in practice, this created difficulties between auditors and management.

To clarify, an organization is assumed to be a going concern in the absence of significant information to the contrary (e.g., an organization’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings). Even if an organization’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting. However, the user of the financial statements should be informed that these conditions exist. With the issuance of ASU 2014-15, there is now guidance in generally accepted accounting principles (GAAP) about management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern, and if so, provide related footnote disclosures.

Auditors have always been required to consider the possible financial statement effects, including footnote disclosures, on uncertainties about an organization’s ability to continue as a going concern for a reasonable period of time (the American Institute of Certified Public Accountant’s Codification of Statements on Auditing Standards Section AU-C 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern). With the implementation of ASU 2014-15, management must now perform this analysis and determine the impact on the financial statements.

ASU 2014-15 now requires that management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued (or, when applicable, within one year after the date that the financial statements are available to be issued for entities with conduit debt). Management should consider, among other issues, the following items in deciding if there is a substantial doubt about an organization’s ability to continue as a going concern (See the related article entitled “Assessing Financial Stability” for a checklist of items to consider):

•Negative trends in operating results, such as a series of losses;

•Loan defaults by the organization;

•Denial of trade credit to the organization by its suppliers;

•Uneconomical long-term commitments to which the organization is subjected; and

•Legal proceedings against the organization.

This evaluation should be based on relevant conditions and events that are known and reasonably foreseeable at the date that the financial statements are issued—or at the date that the financial statements are available to be issued. Substantial doubt about an organization’s ability to continue as a going concern exists when relevant conditions and events indicate that it’s probable the organization will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable as defined in the Accounting Standards Codification (ASC) Topic 450 means that the future event or events are likely to occur.

The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern. If conditions or events raise substantial doubt about an organization’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the organization should disclose information that enables the users of the financial statements to understand all of the following:

a. Principal conditions or events that raised substantial doubt about the organization’s ability to continue as a going concern (before consideration of management’s plans);

b. Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations; and

c. Management’s plans that alleviated substantial doubt about the organization’s ability to continue as a going concern.

It is also possible for nonprofits to mitigate their going concern status by having a third party guarantee their debts or agree to provide additional funds as needed. By doing so, a nonprofit’s management can be reasonably assured that they will remain functional for a reasonable period of time as stipulated by GAAP.

If conditions or events raise substantial doubt about an organization’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an organization should include a statement in the footnotes indicating that there is substantial doubt about the organization’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). Additionally, the organization should disclose information that enables users of the financial statements to understand all of the following:

a. Principal conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern;

b. Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations; and

c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern.

In a situation where management believes that their organization may no longer be a going concern, the issue of whether the organization’s assets are impaired needs to be addressed, as it may call for the write-down of their carrying amount to their liquidation value. The underlying concept is that the value of an organization that is assumed to be a going concern is higher than its break-up value, since an organization that is a going concern can potentially continue to fulfill its mission and serve the public good through providing programmatic activities to its beneficiaries.

ASU 2014-15 is effective for fiscal years ending after December 15, 2016 and can be adopted early.

In the meantime, we encourage you to familiarize yourself with the FASB’s ASU 2014-15, which provides helpful guidance in GAAP about management’s responsibilities surrounding these issues.