Going Concern IFRS Vs. GAAP
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are the two main accounting bodies that publish accounting guidelines. FASB publishes the Generally Accepted Accounting Principles (GAAP), and IASB publishes the International Financial Reporting Standards (IFRS).
Both FASB and IASB have been working together to eliminate the differences between the two accounting standards and for the universal adoption of IFRS. As of now there are many differences between the two standards. One of the differences between IFRS and GAAP is about Going Concern. In both the standards, the concept of Going Concern is crucial for preparing financial statements. When we prepare financial statements we assume that the company is a growing concern and will continue to be in operation after the current year. If Going Concern assumption was not there we would treat our business and accounts such that the business will cease to exist which will completely alter our view of the financial statements. The differences between IFRS and GAAP definition of going concern is a concern while converging the two accounting standards.
Accounting to IFRS, the going concern is for a period defined as the foreseeable future. However, in GAAP, going concern period is taken as generally 12 months from the balance sheet date or 12 months from the date the financial statements are released.
Under GAAP, the standard regarding going concern is defined under AU Section 341. The standard specifies guidelines that an auditor must follow to determine whether a company can be considered a going concern or not. This is auditor’s responsibility. The auditor can look at the trends in the company with respect to various factors such as financial problems, and business operations and make his decision. If he has doubts, he will listen to the management’s plan to rectify the problems. These considerations are recorded in the footnotes of the financial statements.
To converge GAAP with IFRS, FASB has proposed changes. The first is to limit the problems related to auditor’s future considerations upto 12 months from the release of financial statements. Second, it has also proposed changes to shift some responsibility of determining the going concern status from the auditor to management. This puts more responsibility on auditors as they will have to closely consider which events might not occur in another year. Another problem with such changes is the cost-benefit rule. Is it worth spending so much cost and time in determining the going concern status? I think the costs will far outweigh the benefits stakeholders will derive from such analysis.