Going-concern financial reporting in the United States appears headed for new requirements after FASB decided to adopt a new model this week in a project that still has several issues to be decided before the scheduled release of an exposure draft in the first half of next year.
The model under discussion would put the focus of financial reporting requirements for management’s assessment of going concern on the likelihood of an entity’s potential inability to meet its obligations within a reasonable amount of time as they come due, according to a summary of board decisions posted on FASB’s website.
Management would assess the entity’s potential inability to continue as a going concern, and the need for related disclosures, each reporting period.
The triggering circumstance for management to begin disclosing an entity’s financial difficulties comes when it is “near more likely than not” that the entity may be unable to meet its obligations in the ordinary course of business within a reasonable amount of time from the balance sheet date.
Mitigating effects of management’s plans would be considered in assessing the need for disclosures, unless those plans involve actions that are outside the ordinary course of business.
When the likelihood of an entity’s inability to meet its obligations within a reasonable period rises to the level of probable, management would assert in the financial statements that there is substantial doubt about the entity’s ability to continue as a going concern. The effect of all management plans would be considered in evaluating the need for this assertion.
A reasonable amount of time is defined differently depending on the likelihood that an entity will not be able to meet its obligations:
- The reasonable period is 12 months beyond the financial statement period end date for consideration of existing events or conditions that “may” result in an entity’s inability to meet its obligations.
- The reasonable period can extend beyond 12 months but is not to exceed 24 months beyond the financial statement period end date when considering the effect of existing events or conditions that are considered “probable” of resulting in an entity’s inability to meet its obligations.
FASB decisions are tentative, can be changed, and are included in an exposure draft only after a formal written ballot. That potential for change is illustrated by the changes in direction in going concern reporting over the past 10 months.
In January, FASB decided not to require that management assess whether there is substantial doubt about an entity’s ability to continue as a going concern. At that point, board members decided such a requirement would be difficult to apply, and that financial statement users would benefit more from ongoing disclosures about risks and uncertainties.
But in May, the board decided to revisit the question of whether management should make a going-concern assessment. That decision came about as a result of the board’s decision not to pursue going-concern-type disclosures in its project about liquidity and interest rate risk disclosures.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.