As my friends and colleagues already know, I have long been interested in the development of an accounting standard for the disclosure in the financial statements of going concern uncertainties. This post is an update and commentary on recent developments that I find very exciting.
The Financial Accounting Standards Board (“FASB”) announced last week that it asked the FASB staff to prepare a final Accounting Standards Update (“ASU”) on Disclosure of Going Concern Uncertainties. In the announcement, the FASB stated that it had reached decisions on the following issues that had been the subject of significant debate:
- Assessment date
- Look-forward period
- Applicability to nonpublic entities
Decision on these issues follows a round of key decisions that the FASB had made in March regarding:
- Definition of substantial doubt
- Information to be assessed
- Disclosures when substantial doubt exists (and when alleviated)
First, I want to congratulate and thank the FASB for its tenacity in completing this project, and for the reasoned and measured approach it has taken toward this new standard. The process began in May 2007 when the FASB added the project to its agenda, and it seemed there was a lot of on-again, off-again over the past 7 years.
As I am sure most readers of this blog know, going concern disclosure has been an auditing standard (“SAS 59”) since 1989. However, it has never been an accounting standard, where the primary responsibility for identifying the uncertainty, and making the disclosure, lies with management (rather than with the auditors). This always seemed wrong, and backwards, to me.
In 2011 I was contacted by the FASB staff to provide information to the FASB on this project. My October 2011 letter answered several of the staff’s questions. I was asked to write, and submitted in November 2011, a follow-up letter which dealt more specifically with the definition of “substantial doubt”.
The FASB released its Exposure Draft (“ED”) of a proposed ASU titled, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption. It seemed like the FASB had disregarded most of my suggestions. However, the ED received a number of comment letters, including mine. Most of the comments were supportive of having an accounting standard, but described reservations about the FASB’s approach. In my September 2013 letter, I focused on practicality, suggesting an approach that would capitalize on the wisdom gained from 24 years’ experience with SAS 59. In addition, I recommended:
- A one-year look forward period
- Making the assessment at each reporting period
- A simple and straightforward disclosure threshold
- Consideration given to the mitigating effect of management’s plans
- Applying the standard to all entities, public and nonpublic
Read the press release, and my letters, and you will see why I am so excited about what has developed with this new standard. Almost everything I have proposed looks like it will be adopted in the new standard (the proposed definition of “substantial doubt” isn’t exactly what I suggested, but it has the benefit of consistency with other (ASC 450) accounting standards).
We have yet to see the final ASU developed by the FASB staff, and the FASB still has to vote (written ballot). However, Chairman Golden and the FASB should be commended on pushing the project forward to the brink of ultimate success, and I am awaiting the final ASU with anticipation and a measure of pride for having contributed to it.