26 June 2013

FASB proposes improvements to financial reporting of going concern uncertainties

The FASB issued a proposal intended to improve disclosures of uncertainties related to an organisation's ability to continue as a going concern. Comments on proposed ASU, 'Presentation of Financial Statements (Topic 205)', are expected by September 24, 2013.

“Stakeholders have expressed concerns about diverse practices that have arisen in the financial statement footnotes about uncertainties surrounding an organisation’s ability to continue as a going concern—that is, its ability to continue to operate such that it will be able to realise its assets and meet its obligations in the ordinary course of business”, stated FASB Chairman Leslie F Seidman. “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.”

Under US GAAP, financial statements are prepared under the inherent presumption that the reporting organisation will be able to continue as a going concern. The going concern presumption is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.

Currently, there is no guidance in US GAAP about management’s responsibilities in evaluating or disclosing going concern uncertainties, or when or how uncertainties should be disclosed in an organisation’s footnotes. The proposal would provide this guidance, thereby reducing diversity in financial reporting about these uncertainties, while improving the timeliness and quality of footnote disclosures about them. It would do so by incorporating many of the principles that are currently in the auditing standards, and by (1) requiring management to evaluate going concern uncertainties more frequently, (2) prescribing a threshold and related guidance for starting disclosures, (3) requiring an assessment period of 24 months after the financial statement date, and (4) providing a threshold for SEC filers to determine whether there is substantial doubt about an organisation’s ability to continue as a going concern.

The proposed guidance on the disclosure of going concern uncertainties would apply to all reporting organisations, including public companies, private companies, and non-public not-for-profit organisations. Additionally, a public company that is a SEC filer 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.

Press release

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