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Journal entry — Going concern — FASB tentatively agrees to require management to perform assessment

Published on: Nov 08, 2012

At its meeting yesterday, the FASB tentatively agreed that management should be primarily responsible for assessing whether there is substantial doubt about an entity’s ability to continue as a going concern. The FASB’s Summary of Board Decisions notes that in performing such assessment, “management would consider existing events or conditions that may result in an entity’s inability to meet its obligations within a reasonable period of time.” Management would declare that it has “substantial doubt” if the likelihood of the entity’s inability to meet such obligations reached the “probable” threshold. The Board tentatively agreed that a “reasonable period of time” would be 12 months from the balance sheet date and that management would also take into account the effect of probable future events and conditions that could be identified after the 12-month period, but that such period would not exceed 24 months from the balance sheet date.

The Board also tentatively agreed that an entity would be required to disclose information about its potential inability to continue as a going concern before concluding that there is substantial doubt. Such disclosure would be required when it is near more likely than not that the entity is unable to meet its obligations in the ordinary course of business within a reasonable period of time (as defined above). This assessment would also take into account the mitigating actions an entity undertakes within its ordinary course of business. The going-concern assessment would be performed by management as of both interim and year-end reporting periods.

Editor’s Note: Under this model, the responsibility to perform the assessment would shift from auditors (as required under current auditing standards) to management, and guidance on performing the assessment would be incorporated into U.S. GAAP. The Board noted that shifting responsibility for the assessment should enhance the clarity and consistency of such disclosures.

Update on the Status of the Project on the Liquidation Basis of Accounting

This week, the FASB also discussed feedback from respondents on its proposed Accounting Standards Update The Liquidation Basis of Accounting and began formulating a plan for redeliberations.

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