"Going concern" gone: here's an update on the status of the FASB's efforts to incorporate "going concern" guidance into U.S. GAAP.
One sure sign that an entity is in financial trouble is an unfavorable "going concern" opinion from its auditor. Any indication of doubt regarding the entity's ability to continue as a going concern is certain to grab the attention of investors, creditors, and other users of the entity's financial statements.
For several years, the Financial Accounting Standards Board Financial Accounting Standards Board (FASB)
Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). (FASB FASB
See: Financial Accounting Standards Board
See Financial Accounting Standards Board (FASB). ) has been interested in the significance of going-concern assessments. Over time, the Board has explored many ideas for incorporating guidance regarding going-concern assessments and related issues into U.S. Generally Accepted Accounting Principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.
Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (U.S. GAAP GAAP
See: Generally Accepted Accounting Principles
See generally accepted accounting principles (GAAP). ). In this month's column, I'll describe how the FASB has arrived at its current thinking on these matters.
Under U.S. GAAP, there are two bases of accounting: going concern and liquidation. But U.S. GAAP provides no guidance to financial-statement preparers on how to assess an entity's ability to continue as a going concern or on when it's appropriate to use one basis of accounting vs. the other.
Although U.S. GAAP lacks going-concern guidance, such guidance is contained in U.S. Generally Accepted Auditing Standards Generally Accepted Auditing Standards, or GAAS, are ten auditing standards, developed by the AICPA, consisting of general standards, standards of field work, and standards of reporting, along with interpretations. (U.S. GAAS See gallium arsenide. ). Specifically, going-concern guidance is found in the American Institute of Certified Public Accountants' (AICPA AICPA
See American Institute of Certified Public Accountants (AICPA). ) codification of Statements of Auditing Standards (SAS (1) (SAS Institute Inc., Cary, NC, www.sas.com) A software company that specializes in data warehousing and decision support software based on the SAS System. Founded in 1976, SAS is one of the world's largest privately held software companies. See SAS System. ), which largely have been adopted by the Public Company Accounting Oversight Board The Public Company Accounting Oversight Board (or PCAOB) (sometimes called "Peekaboo") is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. (PCAOB) on an interim basis. In particular, AU Section 341, "The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern," states that the auditor of an entity's financial statements is responsible for evaluating the entity's ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited. Furthermore, the auditor's evaluation must be based specifically on knowledge of relevant conditions and events obtained from the auditing procedures performed during a financial statement audit, effectively excluding knowledge that the auditor might obtain from other sources.
Interestingly, AU Section 341 doesn't define what a going concern is but does define what a going concern isn't. If the auditor has "substantial doubt about the entity's ability ... to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions," then the entity ordinarily wouldn't be considered able "to continue as a going concern."
The FASB Takes Notice
Even before the recent financial crisis, the FASB's constituents expressed a need for U.S. GAAP to make an entity's management responsible for assessing the entity's ability to continue as a going concern. Constituents also expressed a need for U.S. GAAP to provide guidance on how management should perform going-concern assessments. And constituents asked for U.S. GAAP to include more guidance on when an entity should apply the liquidation basis of accounting and how costs of liquidation should be presented in the financial statements.
Responding to its constituents, the FASB added the "Going Concern and Liquidation Basis of Accounting" project to its standards-setting agenda in May 2007. Later that year, the Board integrated the project into its "Codification and Retrieval" project. After considerable deliberation, the Board published an exposure draft (ED) of a proposed Statement of Financial Accounting Standards (SFAS SFAS Statement of Financial Accounting Standards
SFAS Special Forces Assessment and Selection
SFAS Student Financial Aid Services
SFAS Sport Fishing Association of Singapore
SFAS Safety Features Actuation System
SFAS Statewide Fixed Assets System ), Going Concern, in October 2008. The proposed Statement would have applied to any business entity or not-for profit entity that prepares financial statements in accordance with U.S. GAAP.
The FASB's proposed SFAS incorporated the going-concern guidance from AU Section 341, modified to align the guidance with International Financial Reporting Standards International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB).
Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). (IFRS). Within IFRS, International Accounting Standard (IAS) 1, Presentation of Financial Statements, and IAS 10, Events after the Balance Sheet Date, have long provided the kind of going-concern guidance that the FASB's constituents sought to be included in U.S. GAAP.
In particular, the proposed SFAS would have required an entity's management, when preparing the entity's financial statements, to assess the entity's ability to continue as a going concern. Additionally, management would have been required to take into account all information about the future at least, but not limited to, 12 months from the end of the reporting period. The proposed SFAS also stipulated that an entity shall prepare financial statements on a going-concern basis unless management either intends to liquidate the entity or to cease operations or has no realistic alternative but to do so. And the proposed SFAS would have required detailed disclosures related to management's going-concern assessment.
After the Exposure Draft
Throughout 2009, the FASB redeliberated issues raised in the comments that it received in response to the Going Concern ED. The Board's redeliberations resulted in changes to its thinking about the kinds of information management would be required to consider when making a going-concern assessment as well as the time frame over which management would be required to consider that information. Also during 2009, the FASB decided to define "going concern" explicitly and to expand the scope of the project to include:
* New required disclosures regarding short-term and long-term risks,
* A definition of substantial doubt as it pertains to management's going-concern assessments, and
* Determining when it's appropriate for an entity to apply the liquidation basis of accounting.
After further redeliberations throughout 2010, the Board changed the name of the project to "Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting." In conjunction with the name change, it also revisited the fundamental questions of whether U.S. GAAP should require management to assess an entity's ability to continue as a going concern and, if so, how. The Board also increased its emphasis on prescribing how and when an entity should apply the liquidation basis of accounting.
At its October 26, 2011, meeting, the FASB decided that improving disclosures that would serve as an early warning of an entity's potential inability to continue as a going concern would not be an objective of the "Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting" project. That decision was partly because the Board recently decided to add incremental disclosures about liquidity risk in the separate project on accounting for financial instruments.
Subsequently, during its January 11, 2012, meeting, the Board decided to not require that management of an entity assess whether there's substantial doubt about the entity's ability to continue as a going concern. Most Board members believed that such a requirement would be difficult to apply and that users of financial statements would benefit to a greater extent from ongoing disclosures about risks and uncertainties than they would from disclosures that would be made only after management concludes that there's substantial doubt about an entity's ability to continue as a going concern.
Most recently, at its February 15, 2012, meeting, the Board affirmed earlier tentative decisions about when and how an entity should apply the liquidation basis of accounting. It also affirmed that under the liquidation basis of accounting, an entity should prepare, at a minimum, a statement of net assets in liquidation and a statement of changes in net assets in liquidation and that it should disclose all measurement bases and significant assumptions.
As you can see from the history of this project, the FASB's thinking about "going concern" issues has changed significantly over time, and the Board scrapped many prior tentative decisions. Financial-statement preparers should watch for the FASB to issue a new ED of a proposed Accounting Standards Update in the second quarter of 2012. As always, the issuance of the ED will represent an opportunity for you to voice your opinion on the changes to U.S. GAAP that the FASB is about to propose.
Bruce Pounder, CMA CMA - Concert Multithread Architecture from DEC. , CFM, Editor
Bruce Pounder, CMA, CFM, DipIFR (ACCA), is Director of Professional Programs for Loscalzo Associates, LTD LTD 1 Laron-type dwarfism 2 Leukotriene D 3 Long-term depression, see there 4. Long-term disability ., a division of SmartPros Ltd. He is also the immediate past chair of the IMA (Interactive Multimedia Association, Annapolis, MD) An earlier trade association founded in 1988 originally as the Interactive Video Industry Association. It provided an open process for adopting existing technologies and was involved in subjects such as networked services, scripting [R] Small Business Financial and Regulatory Affairs Committee. You can reach him at BrucePounder@Loscalzo.com.