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Journal Entry — Going Concern — FASB Exposure Draft Imminent

Published on: Feb 01, 2013

At its meeting yesterday, the FASB discussed various aspects of its going-concern project, including (1) additional analysis of the more-likely-than-not (MLTN) threshold, (2) consideration of management’s plans in assessing the need for disclosures, (3) disclosure requirements, (4) nonpublic-entity considerations, and (5) next steps.

Additional Analysis of the MLTN Threshold

The Board agreed that disclosures about an entity’s potential inability to continue as a going concern would be required when it is MLTN that the entity is unable to meet its obligations in the ordinary course of business (OCOB) within a reasonable amount of time.1 However, the Board decided to add a paragraph cautioning that this is not a “bright-line threshold”; therefore, an entity must use significant judgment in performing the assessment. To align this guidance with current auditing standards on this topic, the Board also agreed to include similar examples of events and conditions that may indicate that an entity is unable to meet its obligations.

Consideration of Management’s Plans in Assessing the Need for Disclosures

As noted above, an entity would not consider actions that are outside the OCOB when assessing the need for going-concern disclosures under the MLTN threshold. According to the meeting handout, the staff recommended defining outside the OCOB as shown below, which the Board tentatively agreed to:

Management’s plans that would require actions of a nature, magnitude, or frequency inconsistent with actions customary in carrying out an entity’s ongoing business activities shall be considered outside the ordinary course of business.

Management’s plans specifically intended to mitigate concerns about an entity’s ability to meet its obligations within a reasonable period of time shall be considered outside the ordinary course of business. In addition, management’s plans that are not definitive, or are in early stages of implementation, shall also be considered outside the ordinary course of business when assessing the need for disclosures.

In addition, the Board tentatively decided to give examples of plans that are outside the OCOB.

Disclosure Requirements

The Board tentatively agreed that an entity would be required to provide the following disclosures, as outlined in the Board handout, when the entity meets the MLTN threshold:

(a) Principal conditions or events giving rise to the entity’s potential inability to meet its obligations for a reasonable period of time

(b) The possible effects of such conditions or events

(c) Management’s evaluation of the significance of those conditions or events and any mitigating factors

(d) Possible discontinuance of operations

(e) Management’s plans

However, the Board did not agree with the staff’s recommendation to include in the going-concern guidance a requirement for entities to disclose adjustments made to the recoverability, amounts, or classification of recorded assets or liabilities, since such disclosures are already required by other standards.

The overall purpose of the disclosures is to describe how management evaluated and reached conclusions about its “potential inability to meet its obligations as they become due for a reasonable period of time.”

Editor’s Note: When an entity concludes that there is substantial doubt about its ability to continue as a going concern (i.e., it is probable that it cannot meet its obligations within a reasonable period of time), its financial statements would need to include such an assertion in addition to the required disclosures.

Nonpublic-Entity Considerations

While the Board agreed that management should assess an entity’s ability to continue as a going concern, it believes that nonpublic entities should not be required to assert that there is substantial doubt about their inability to continue as a going concern. However, nonpublic entities would be required to apply all other aspects of the proposed guidance (including disclosures related to the MLTN threshold).

Next Steps

The Board gave the staff permission to draft a proposed ASU on going concern. Since this is a disclosure-only standard, the Board agreed that it would be applied prospectively. The Board expects to issue the proposed ASU by late March or early April 2013 for a 90-day comment period.

 


[1] As discussed in Deloitte’s November 8, 2012, journal entry, 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.

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