FinREC, CAQ: Management should make going-concern assertion

BY KEN TYSIAC
September 25, 2013

Going-concern assertions are appropriately made by management, the AICPA’s Financial Reporting Executive Committee (FinREC) and the Center for Audit Quality (CAQ) said in comment letters supporting a FASB proposal.

The comment period ended Tuesday for FASB’s proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205), Disclosure of Uncertainties About an Entity’s Going Concern Presumption.

FinREC and the CAQ, which is affiliated with the AICPA, both commended FASB for its work developing a going-concern model that requires preparers to perform a going-concern assessment and, where required, provide footnote disclosures about going-concern uncertainties in each reporting period.

FASB is undertaking the project because U.S. GAAP does not explicitly define financial statement preparers’ responsibilities with respect to disclosing conditions that may give rise to substantial doubt about an entity’s ability to continue as a going concern.

Financial statements currently are prepared under the presumption that an entity will be able to realize its assets and meet its obligations in the ordinary course of business. When liquidation is imminent, the organization starts applying the liquidation basis of accounting in its financial statements.

Currently, auditors are required under U.S. auditing standards to assess whether there is substantial doubt about an entity’s ability to continue as a going concern.

FASB asked stakeholders to evaluate whether possible bias on the part of management would cause its going-concern evaluation to be of little use for investors. Both FinREC and the CAQ said management bias has the potential to affect other aspects of financial reporting, too, so an exception should not be made with respect to going concern.

“Management should be making a going-concern assessment,” Aaron Anderson, CPA, a FinREC member and chairman of its going-concern task force, said in a telephone interview. “It should not be just left in the hands of the auditor.”

In addition, FinREC welcomed the clarifications in the proposal around the definition of “going concern,” clarity surrounding the time horizon over which an entity should be evaluated, and clarification about the information used in that evaluation.

Under the proposal, an organization would evaluate going-concern uncertainties at each annual and interim reporting period, and start providing footnote disclosures when it is:

  • 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
  • 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.


Convergence important

Because the proposal would contain criteria and a time horizon that are different from the guidance auditors currently are using, FinREC advised FASB to coordinate with other standard setters to ensure a converged approach for preparers and auditors.

FinREC said FASB should work with the PCAOB, the Auditing Standards Board, and the International Auditing and Assurance Standards Board (IAASB) on a common approach. FinREC said FASB should set its effective date to give the auditing standard setters time to update their standards.

The PCAOB has a project on its agenda to review the standards governing auditors’ going-concern responsibilities, and the IAASB’s exposure draft proposing changes to the auditor’s reporting model includes changes that would be made to auditor’s communication responsibilities with respect to going concern.

“We don’t want to have a situation where the auditors are applying one set of standards to assess going concern and management is applying a different set,” Anderson said. “It’s somewhat illogical that there would be different approaches to going concern.”

In addition, FinREC encouraged FASB to work to achieve convergence with the International Accounting Standards Board (IASB), which also has an active project on going concern. But FinREC said working toward convergence should not delay FASB’s proposed standard.

Convergence with FASB and the IASB on going concern is critical, Anderson said, because of competitive advantages that could result from different standards. If accounting standards differ, competing businesses in different jurisdictions could arrive at different going-concern conclusions even if they otherwise were identical. Customers would then gravitate toward the business without the going-concern uncertainty.

“If you don’t actively attempt convergence in this area, there is concern in the future that you could have a crisis on one side of the Atlantic exacerbated because our rules are tighter than theirs, or vice versa,” Anderson said. “That’s the main logic, that in a globally competitive landscape, this is not one area where divergence is in the best interests of stakeholders. Convergence with the IASB, I think, should be a high priority.”

Recommendations for FASB

Although the proposal states that only SEC filers should evaluate whether there is substantial doubt about the entity’s going-concern presumption, FinREC recommended that all companies—not just SEC filers—should make this disclosure.

In addition, FinREC recommended that interim assessments be performed only when triggered by a known or probable future event and that FASB should clarify the type of activities considered outside the ordinary course of business that might give rise to a going-concern uncertainty.

The CAQ’s letter recommended that FASB devote attention to several areas to make the proposal operational. These include:

  • A lack of sufficient application guidance surrounding the evaluation of management’s plans.
  • A need for further clarification around the “substantial doubt” threshold.


But the CAQ said the proposal represents an improvement over the current going-concern model, and FinREC said FASB’s current proposal improves on its original going-concern exposure draft, which was issued in 2008.

“The current model, which relies on an auditor assessment, is not sustainable,” Anderson said. “We need to have something within GAAP. And frankly, as the FASB said, as a company gets closer and closer to potentially shutting its doors, the disclosures should get more robust.”

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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