FASB clarifies ‘going concern’ reporting

The standard setter outlined managers’ responsibilities to evaluate when the firm or one of its portfolio companies is on the brink of collapse.

GPs now have a defined set of reporting rules to follow when there is doubt about a portfolio company’s ability to survive, or likewise, if the management firm is no longer a “going concern” in accounting parlance.

The new standard released by the Financial Accounting Standards Board provides new guidance as previously US GAAP made no mention of manager’s responsibility to evaluate when there was doubt about an entity’s ability to continue operating as a going concern.

In the past, going concern disclosures were also largely up to auditors, leading to inconsistencies in what fashion a going concern risk would be reported and where in the statement it would be disclosed. The new guidelines are intended to reduce diversity in the timing and content of disclosures provided in footnotes. However, the amendments represent a departure from international reporting standards created by the International Accounting Standards Board, which is working with FASB to converge accounting standards worldwide as much as possible.

Specifically the new guidance defines the term “substantial doubt”; requires preparers of financial statements to evaluate the business every reporting period; includes a number of new disclosure requirements and forces preparers to assess the quality of their reporting one year after the date.

The guidance is effective for any annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.