Under accounting principles generally accepted in the United States of America (U.S. GAAP), financial statements are prepared under the presumption that the reporting entity will be able to continue as a going concern. This means the entity will continue to operate and will be able to realize its assets and meet its obligations in the ordinary course of business (the going concern presumption).
Financial statements are prepared under the going concern presumption until an entity's liquidation is imminent. However, before an entity's liquidation is imminent there may be uncertainties about its ability to continue as a going concern. U.S. GAAP provides no guidance about when and how going concern uncertainties should be disclosed in the notes to an entity's financial statements.
The Financial Accounting Standards Board ("FASB") has an ongoing project related to disclosures about risks and uncertainties and the liquidation basis of accounting. The FASB recently received comment letters responding to its June 2013 Exposure Draft ("ED") for a proposed accounting standards update ("ASU"). The FASB believes there is a lack of guidance in U.S. GAAP on this issue which is causing differences of interpretation as to when and how going concern uncertainties should be disclosed.
The main provisions of the proposed amendments identify management's responsibilities in evaluating an entity's going concern uncertainties and the timing and content of related footnote disclosures. Currently, guidance regarding an auditor's consideration of an entity's ability to continue as a going concern resides only in the auditing literature. The FASB wants to move it to the accounting literature so that management is responsible.
The FASB decided that management should provide disclosures when existing events or conditions indicate that it is:
1. More likely than not the entity will be unable to meet its obligations within 12 months after the financial statement date; or
2. Probable that the entity will be unable to meet its obligations within 24 months after the financial statement date.
Management would assess information about conditions and events that exist at the date the financial statements are issued. Mitigating conditions and events also would be considered. In determining whether disclosures are necessary, however, an entity would not consider the potential mitigating effect of management's plans that are outside the ordinary course of business.
Assuming the above disclosure threshold is met, an entity would disclose in the footnotes a description of:
- the principal conditions and events that give rise to the entity's potential inability to meet its obligations,
- possible effects those conditions and events could have,
- management's evaluation of the significance of those conditions and events,
- mitigating conditions and events, and
- management's plans
Additionally, the proposed amendments would require an entity that is an SEC filer to evaluate whether there is substantial doubt about its going concern presumption. If there is substantial doubt, the entity would disclose that determination in the footnotes. Substantial doubt would exist if, after assessing existing conditions and events and after considering all of management's plans (including those outside the ordinary course of business), the entity concludes that it is known or probable that it will be unable to meet its obligations within 24 months after the financial statement date. An entity that is not an SEC filer would not be required to evaluate or disclose whether there is substantial doubt about its going concern presumption but would be required to apply all of the other disclosure requirements within the proposed amendments.
Evaluations would be done at each annual and interim period.
There is no effective date set for the implementation of the proposed ASU. It will be determined after the FASB considers feedback. The new standards would apply prospectively to reporting periods after the effective date.
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