On June 26, 2013, the FASB (the “board”) issued a proposal that would require management to perform going concern assessments and provide related footnote disclosures in certain circumstances.
Under the proposal, all entities would be required to make certain disclosures when management concludes that either a) it is more likely than not that the entity will be unable to meet its obligations for a period of 12 months beyond the financial statement date, or b) it is known or probable that the entity will not be able to meet its obligations for a period of 24 months beyond the financial statement date. In determining whether these disclosures are necessary, an entity would not consider the mitigating effect of management’s plans that are outside the ordinary course of business. Management's plans “outside the ordinary course of business” are those that would require actions of a nature, magnitude or frequency inconsistent with actions customary in carrying out an entity's ongoing business activities.
The proposal includes an additional requirement for SEC filers. If after factoring in the mitigating effect of all management's plans, including those outside the ordinary course of business, it is known or probable that the entity will not be able to meet its obligations for a period of 24 months beyond the financial statement date, SEC filers would be required to disclose that there is substantial doubt about the entity's ability to continue as a going concern.
Threshold for disclosure
The board decided that the thresholds for disclosures should be based on more likely than not and probable as these are well understood and would therefore meet the objective of reducing diversity in the timing of disclosures.
When management concludes that the above threshold for disclosure has been met, disclosures that provide users with an understanding of the following would be required:
The nature and extent of disclosures would be expected to increase as additional information about previously disclosed conditions and events becomes available. Additional explanation would be required in a period in which management determines that disclosure is no longer required.
In addition, if management of an SEC filer concludes that substantial doubt exists about the entity’s ability to continue as a going concern, the disclosures would need to include a statement to that effect that uses the words “substantial doubt” and specific phrases that use the term “going concern.”
Frequency of assessment
The assessment and disclosures would be required in all interim and annual reporting periods.
While IFRS has an existing standard on going concern, there are notable differences between the proposal and the IFRS standard in key areas such as the disclosure thresholds, the assessment period, and the additional disclosure proposed for SEC filers.
The proposed guidance would apply to all entities, with incremental disclosure required for SEC filers.
The FASB will consider constituent feedback before determining an effective date. The proposed amendments would be applied prospectively.
Comments on the FASB's proposal are due by September 24, 2013.
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.