FASB will not require management to assess whether there is substantial doubt about an entity’s ability to continue as a going concern.
After its board meeting Thursday, FASB announced that a majority of board members determined that such a requirement would be difficult to apply. Board members decided that users of financial statements would benefit more from ongoing disclosures about risks and uncertainties.
Disclosures made only after management concludes there is substantial doubt about an entity’s ability to continue as a going concern would be less beneficial to users of financial statements, according to the board.
The next step in the project is developing a principle for an entity to determine the adequacy of its disclosures about risks and uncertainties, and to evaluate how the content of those disclosures could be improved. The board directed the FASB staff to develop such a principle.
FASB first issued a Proposed Statement of Financial Accounting Standards, Going Concern, on Oct. 9, 2008, for a 60-day comment period. The proposal would have required an entity to assess its ability to continue as a going concern, preparing financial statements on a going-concern basis unless liquidating or ceasing operations was the entity’s intention or only realistic alternative.
Management would have been required to take into account all available information about the future, which was defined as at least, but not limited to, 12 months from the end of the reporting period.
The proposal would have required management to disclose uncertainties that cast substantial doubt upon the entity’s ability to continue as a going concern.
FASB’s summary of the comment letters indicated that a large majority of the 29 respondents generally supported FASB’s initial decision to include guidance on going-concern assessments in accounting literature. But respondents also had concerns. According to FASB’s Comment Letter Summary, a few respondents said the wording “all available information about the future” was too broad and could require management to consider an endless amount of information “regardless of its quality or relevance.”
A few respondents questioned how much time and money management should devote to considering all available information about the future. A few observed that the purpose of a going-concern assessment is to address the viability of an entity over the next 12 months, not assess the viability of a business model in general.
Currently, AICPA Statement on Auditing Standards (SAS) no. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (AICPA, Professional Standards, vol. 1, AU sec. 341), provides the U.S. guidance on this topic. It states that the auditor is responsible for evaluating whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period not more than one year beyond the date of the financial statements’ being audited. Information obtained during a financial statement audit is the basis for this evaluation.
In October 2011, the board decided that improving disclosures to serve as an early warning of an entity’s potential inability to continue as a going concern would not be an objective of the project, which was renamed Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting. That decision was partly a result of the board’s recent decision to add incremental disclosures about liquidity risk in the separate project on accounting for financial instruments, according to FASB’s report from the board meeting.
That left the board to decide whether management or outside accountants of an entity should have the primary responsibility for performing the going-concern assessment.
Another objective of the project was how and when an entity should apply the liquidation basis of accounting.
FASB has previously decided in the project that an entity should prepare financial statements on the going-concern basis unless a plan of liquidation has been approved by the owners or is being imposed by other forces and it appears remote that the entity will become a going concern in the future.
Liquidation basis financial statements, FASB decided, should reflect relevant information about the value of an entity’s resources and obligations in liquidation. They should consist of a statement of net assets in liquidation, and a statement of changes in net assets in liquidation.
—Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.
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