By Anne Rosivach
The Financial Accounting Standards Board (FASB)
voted at its November 7 meeting to adopt a financial reporting model for management's assessment of going concern and related disclosures. Earlier in 2012, the Board decided to address going concern guidance separately from "The Liquidation Basis of Accounting," which was issued in exposure draft (ED) in July. The Board expects to issue an ED of the going concern proposal in the first half of 2013.
During the recorded webcast of the meeting
, FASB staff stated that companies already have going concern disclosures within their footnotes when their auditors decide there is substantial doubt. But while auditors have standards, management does not, and there is a lack of consistency in the timing and nature of information in the footnotes about significant threats to an entity's ability to continue as a going concern.
The objective of the proposed new model is to give accounting guidance characterized by standardization, consistency, structure, and discipline. The guidance would encompass how an entity should assess its ability to continue as a going concern, the timing, nature and extent of any related disclosure requirements, and what should be the nature of the disclosure.
Board members applauded the staff for their approach to the project - bringing what is in the auditing literature into US GAAP.
The International Financial Reporting Standards (IFRS) already has a standard saying that management has the responsibility to assess an entity's ability to continue as a going concern. Board members said during the meeting that it is not possible to predict whether FASB's current work will lead to convergence.
The proposed model described in the Minutes of the November 7, 2012, Board Meeting
recommends that management should start providing disclosures in its financial statements about an entity's financial difficulties when existing events or conditions indicate it is more likely than not
that the entity may be unable to meet its obligations in the ordinary course of business
, within a reasonable period of time
from the balance sheet date. Board members recommended that management provide disclosures in the footnotes that are not redundant with respect to Management's Discussion and Analysis (MD&A).
- Perform an assessment of the going concern assumption and provide disclosures when required for each reporting period. Today the assessment is done annually. The proposed model would encourage management to consider these issues throughout the year and provide investors with timely information. Several board members expressed concern about the potential for a self-fulfilling prophecy, but the Board approved timely disclosure.
- Assess the inability to meet its obligations in the normal course of business for a reasonable period of time, which would be for a twelve- to twenty-four-month period.
- Assert in the financial statements that there is substantial doubt about an entity's ability to continue as a going concern when the likelihood of the entity's inability to meet its obligations within a reasonable period of time reaches probable. In evaluating the need for this assertion, management would consider the effect of all management plans. The Board approved the definition of "substantial doubt" as "probable."
Board member Daryl Buck said that he did not think that management would be able to make an unbiased judgment. Management would tend to be optimistic about its company's ability to continue in business.
The current model does not address specific disclosures. In the November 7 meeting minutes, the Board announced that it plans in a future proposal to discuss (1) the applicability of the model to nonpublic entities, (2) the nature of disclosures and its interaction with the MD&A for public companies, (3) guidance on how management's plans should be distinguished and considered, and (4) effective date and transition. The staff will return to the Board with a package for discussion.
Auditing literature, including Statement on Auditing Standards (SAS) No. 126, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern (Redrafted), which supersedes SAS No. 59, addresses the auditor's responsibility. An auditor is required to issue a modified (but unqualified) report when the auditor concludes that threats have reached the level of substantial doubt about the entity's ability to continue as a going concern.