In brief: FASB moving forward on "going concern" standard (No. 2012-50)

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Years after adding the project to its agenda, the FASB took a significant step forward at its November meeting toward developing a new going concern standard. With the stated objectives of bringing increased discipline, structure, and consistency to existing disclosure practices, the FASB decided to require management to formally perform going concern assessments and provide related footnote disclosures.This In brief article provides an overview of the FASB's key decisions and what's next.

What's new?

Years after adding the project to its agenda, the FASB took a significant step forward at its November meeting toward developing a new going concern standard. With the stated objectives of bringing increased discipline, structure, and consistency to existing disclosure practices, the FASB decided to require management to formally perform going concern assessments and provide related footnote disclosures.

What were the key decisions? 

The board’s decisions, many of which were unanimous, make management responsible for assessing and disclosing the likelihood of the entity's ability to meet its obligations in the ordinary course of business for a reasonable period of time beyond the balance sheet date.

The assessment

The FASB decided to require certain disclosures when management concludes it is more likely than not that the entity will not be able to meet its obligations in the ordinary course of business for a reasonable period of time. When management concludes it is probable that the entity will not be able to meet its obligations in the ordinary course of business for a reasonable period of time, a statement that there is substantial doubt about the entity's ability to continue as a going concern would also be required.

The assessment would factor in the mitigating effect of management's plans unless those plans require actions outside the ordinary course of business.

Threshold for disclosure

The FASB hesitated to define the thresholds of more likely than not and probable with bright-line percentages. Rather, the FASB suggested that the standard include guidance on how to apply these thresholds and discourage the use of bright lines.

Time horizon

The board agreed to define a reasonable period of time as 12 months from the balance sheet date. However, management would also consider events that are probable of resulting in an entity's potential inability to meet its obligations beyond 12 months. The combined assessment period would not exceed 24 months.

Frequency of assessment

The board agreed that the assessment and related disclosures would be made at each reporting period, including interim periods.

Is convergence achieved? 

While the objective of the project is not specifically aimed at convergence with IFRS, the model described above is more consistent with IFRS, which requires management to assess going concern.

Who's affected?

The FASB's discussions were focused on public companies, but the staff plans to separately address non-public company concerns. This suggests the exposure draft will likely be applicable to all companies.

What's next?

The FASB plans to hold additional discussions in December 2012. These discussions will address:

• Applicability to non-public entities
• Further analysis of the nature of disclosures and interaction with MD&A for public companies
• Guidance on how management’s plans should be distinguished and considered
• Effective date

The FASB is targeting to complete deliberations in December and issue an exposure draft by March 2013.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Risk Management team in the National Professional Services Group.

Authored by:

Timothy Corrigan
Partner
Phone: 1-973-236-5302
Email: timothy.corrigan@us.pwc.com

Guy Raymaker
Partner
Phone: 1-973-236-4180
Email: guy.raymaker@us.pwc.com

Sarah Fitch
Director
Phone: 1-973-236-4404
Email: sarah.fitch@us.pwc.com

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