The Financial Accounting Standards Board has issued a proposal to improve disclosures of uncertainties related to an organization’s ability to continue as a going concern.
Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will be able to continue as a going concern, which is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.
Currently, there is no guidance in U.S. GAAP about management’s responsibilities in evaluating or disclosing going concern uncertainties, or when or how uncertainties should be disclosed in an organization’s footnotes, FASB acknowledged. The proposal would provide this guidance, reducing diversity in financial reporting about these uncertainties, while improving the timeliness and quality of footnote disclosures about them. The proposal incorporates many of the principles currently in the auditing standards, and would require management to evaluate going concern uncertainties more frequently. Under the proposed accounting standard changes, FASB is prescribing a threshold and related guidance for starting disclosures, requiring an assessment period of 24 months after the financial statement date, and providing a threshold for SEC filers to determine whether there is substantial doubt about an organization’s ability to continue as a going concern.
“Stakeholders have expressed concerns about diverse practices that have arisen in the financial statement footnotes about uncertainties surrounding an organization’s ability to continue as a going concern—that is, its ability to continue to operate such that it will be able to realize its assets and meet its obligations in the ordinary course of business,” said FASB Chairman Leslie F. Seidman in a statement. “This proposal seeks to address those concerns by clarifying management’s responsibilities about evaluating and disclosing going concern uncertainties, while improving the timeliness and quality of footnote disclosures about them.”
The proposed guidance on the disclosure of going concern uncertainties would apply to all reporting organizations, including public companies, private companies and nonpublic not-for-profit organizations. In addition, a public company that files its financial statements with the SEC would be required to evaluate and determine whether there is substantial doubt about its ability to continue as a going concern and, if there is substantial doubt, disclose that determination in the footnotes.
FASB is asking stakeholders to review and provide comments on the proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205):
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