The Financial Accounting Standards Board (“FASB”) recently issued a proposal to improve practices surrounding the responsibility for assessing and reporting whether an entity is a “going concern”. Financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have an inherent presumption that the entity is able to continue with its operations, realizing its assets and honoring its obligations, and is thereby a going concern. If there is a question as to whether this is the case it must be disclosed. However the existing rules do not provide clear guidelines as to (i) management’s responsibilities to evaluate or disclose going concern uncertainties or (ii) when and how such uncertainties should be disclosed in financial statement footnotes.
Under the proposed amendments,
“An entity would evaluate gong concern uncertainties at each annual and interim reporting period and start providing footnote disclosures when it is either (1) more likely than not that the entity will be unable to meet its obligations within 12 months after the financial statement date without taking actions outside the ordinary course of business or (2) known or probable that the entity will be unable to meet its obligations within 24 months after the financial statement date without taking actions outside the ordinary course of business. In determining whether disclosures are necessary, an entity would assess information about conditions and events that exist at the date the financial statements are issued (or for a nonpublic entity the date that the financial statements are available to be 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.
When the above disclosure threshold is met, an entity would disclose in the footnotes a description of (1) the principal conditions and events that give rise to the entity’s potential inability to meet its obligations, (2) the possible effects those conditions and events could have on the entity, (3) management’s evaluation of
the significance of those conditions and events, (4) mitigating conditions and events, and (5) management’s plans that are intended to address the entity’s potential inability to meet its obligations. Disclosures may be less extensive in the early stages because available information may be limited. In subsequent reporting periods, disclosures may, depending on the circumstances, become more extensive as additional information becomes available about the conditions and events and about 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.”
FASB is accepting comments on the proposed change until September 24, 2013. All comments will be publicly available on FASB’s online public reference room.