Recently, the FASB tentatively decided to require disclosure regarding a substantial doubt about an entity’s ability to continue as a going concern. The FASB did not, however, decide to require the early-warning disclosure that it had proposed in an Accounting Standards Update issued in June 2013. The tentative single threshold approach is consistent with existing auditing standards. Generally, under existing auditing standards, the ability to continue as a going concern requires an entity to determine that it is able to meet its obligations as they become due for a period of 12 months.
The proposed update would have required the assessment of certain early-warning disclosure criteria for a period of 24 months, and SEC filers would have had to assess whether there was substantial doubt about the entity’s ability to continue as a going concern for a period of 24 months after the balance sheet date. The FASB’s tentative approach took into account the feedback it received on the proposed update.
Under the single-threshold approach, an entity would begin to make going concern disclosures when the entity determines that information about existing conditions or events, in the aggregate, indicates that there is a substantial doubt about the entity’s ability to continue as a going concern. The FASB determined that the appropriate likelihood standard would be “probable,” as used in the accounting literature related to loss contingencies. In addition, the FASB decided that the time frame for the substantial doubt determination would be 12 months from the date the financial statements are issued. The FASB affirmed the proposed update’s requirement to assess substantial doubt at each annual and interim reporting period.
The FASB determined to clarify how management plans to address the going concern uncertainty should be evaluated. The Board decided that the mitigating effect of plans should be taken into account to the extent it is probable that those plans will both alleviate the adverse conditions within the assessment period and will be effectively implemented.
The FASB also reached a decision regarding the appropriate disclosures to be included in the notes to the financial statements when management determines that there is a substantial doubt about an entity’s ability to continue as a going concern. It decided that the notes to the financial statements should disclose the following:
- The substantial doubt about the entity’s ability to continue as a going concern
- The principal conditions and events giving rise to substantial doubt
- Management’s evaluation of the significance of those conditions and events
- Any mitigating conditions and events, including management’s plans
In addition, the FASB decided to require disclosure in the financial statements when substantial doubt about an entity’s ability to continue as a going concern has been alleviated primarily by management’s plans. Those disclosures would include the principal conditions and events that initially raised the substantial doubt as well as management’s plans that alleviated the substantial doubt.
The FASB expects to continue redeliberations of the going concern standard in May 2014.