The Financial Accounting Standards Board (FASB) issued proposed amendments on June 26, 2013, to provide guidance about management's responsibilities in evaluating a company's going concern uncertainties in addition to the timing and content of related footnote disclosures. Even before a company’s liquidation is imminent, there may be uncertainties about a company’s ability to continue as a going concern and, therefore, about its going concern presumption (going concern uncertainties). Currently, there is no guidance in the U.S. Generally Accepted Accounting Principles (GAAP) about management’s responsibilities in evaluating or disclosing these going concern uncertainties in financial statements.
The proposed amendments provide guidance under the U.S. GAAP about a company's responsibility to review going concern uncertainty, requiring annual and interim disclosure in the form of footnotes to the financial statements. Specifically, a company would review going concern uncertainty at each annual and interim reporting period and provide footnote disclosure if it is:
- more likely than not that the company will be unable to meet its obligations within 12 months after the financial statement date, without taking actions that fall outside the ordinary course of business
- known or probable that the company will be unable to meet its obligations within 24 months after the financial statement date, without taking actions that fall outside of the ordinary course of business
In determining whether disclosures are necessary, a company would assess information about conditions and events that exist at the date the financial statements are issued. Mitigating conditions and events also would be considered. In determining whether disclosures are necessary, however, a company would not consider the potential mitigating effect of management’s plans that are outside the ordinary course of business.
If disclosure is triggered by the above thresholds, the company must disclose in the footnotes the following:
- the principal conditions and events that give rise to the company’s potential inability to meet its obligations
- the possible effects those conditions and events could have on the company
- management’s evaluation of the significance of those conditions and events
- mitigating conditions and events
- management’s plans that are intended to address the company’s potential inability to meet its obligations
Additionally, the proposed amendments would require a company to evaluate whether there is substantial doubt about its going concern presumption. If there is substantial doubt, the company must disclose that determination in the footnotes. Substantial doubt would exist if, after assessing existing conditions and events — and after considering all of management’s plans, including those outside the ordinary course of business — the company concludes that it is known or probable that it will be unable to meet its obligations within 24 months after the financial statement date.
Currently, the SEC’s rules require disclosure in management’s discussion and analysis (MD&A) of trends and uncertainties that are reasonably likely to have a material effect on the company's liquidity, capital resources and results of operations (Regulation S-K, Item 303(a)), including going concern uncertainties. Additionally, the SEC’s rules mandate disclosure about a company's most significant risk factors (Regulation S-K, Item 503(c)), which also may include going concern uncertainties. FASB stated that the amendments would not present new or incremental information in an SEC filing as a whole, but would provide guidance in the U.S. GAAP about the timing and content of footnote disclosures specific to going concern uncertainties.
Comments to the FASB on the proposed rule are due September 24, 2013.