FASB standardizes going concern warnings

This week the Financial Accounting Standards Board released a proposal intended to improve disclosures of uncertainties related to an organization’s ability to continue as a going concern.

“Stakeholders have expressed concerns about diverse practices that have arisen in the financial statement footnotes about uncertainties surrounding an organization’s ability to continue as a going concern – that is, its ability to continue to operate such that it will be able to realize its assets and meet its obligations in the ordinary course of business,” stated FASB chairman Leslie Seidman. 

The US standards-setter wants private equity firms, their portfolio companies and other organizations following US GAAP to evaluate going concern uncertainties by looking 24 months after the financial statement date for any signs of an inability to meet its obligations as they become due. 

In the past, prepares of financial statements warned about going concern uncertainties in a variety of ways, leading to inconsistencies in what fashion a going concern risk would be reported and where in the statement it would be disclosed. 

“This proposal seeks to address those concerns by clarifying management’s responsibilities about evaluating and disclosing going concern uncertainties, while improving the timeliness and quality of footnote disclosures about them,” said Seidman. 

To that end the proposal provides more guidance and instruction on when and how to report going concern uncertainties, and requires preparers to assess the financial health of their organizations with more regularity. 

During a consultation period, some stakeholders expressed concern that the ongoing concern uncertainty standards would duplicate reporting already required for firms registered with the US Securities and Exchange Commission (SEC). 

Private equity firms registered with the SEC (i.e. those managing more than $150 million in assets) must disclose in their management’s discussion and analysis (MD&A) information about any factors that could have a significant impact on the registrant’s liquidity, capital resources and ongoing operations. 

“The proposed amendments would not present new or incremental information in an SEC registrant’s filing as a whole. However, the proposed amendments would provide SEC registrants with guidance in US GAAP about the timing and content of footnote disclosures specific to going concern uncertainties,” argued FASB in its proposal. 

FASB will accept feedback on its proposal until September 24.