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Journal entry — Going concern — FASB makes tentative decisions in response to feedback

Published on: Mar 28, 2014

At its meeting earlier this week, the FASB discussed the results of additional outreach conducted by its staff and redeliberated the going-concern reporting model (for information about the exposure draft (ED) of the proposed Accounting Standards Update (ASU),1 see Deloitte’s June 27, 2013, Heads Up). On the basis of the feedback received, the Board made tentative decisions on the following topics:

  • Single-threshold model — The Board tentatively decided to use a single-threshold model for determining whether there is substantial doubt about an entity’s going-concern presumption. This marks a change from the ED, which contained two thresholds — a “more-likely-than-not threshold” for the next 12 months and a “known or probable threshold” for the next 24 months after the financial statement date. A single-threshold model is consistent with current auditing standards.2
  • Definition of “substantial doubt” — The Board tentatively decided to define the substantial-doubt threshold as “probable,” in a manner consistent with the definition in the ED. That is, there would be substantial doubt when it is “probable that an entity will be unable to meet its obligations” for the 12-month period from the date the financial statements were issued or available to be issued. Current auditing standards do not explicitly define substantial doubt and instead provide qualitative factors for entities to consider.
  • Assessment period— The ED proposed requiring a 24-month assessment period after the financial statement date. At the meeting, the Board tentatively decided to require an assessment period of 12 months from the date the financial statements were issued or available to be issued. Such assessment period is longer than the period of one year from the date of the financial statements (i.e., the balance sheet date) that is used in current auditing standards.

    Editor’s Note: The change in the assessment period would extend the time horizon and forecasting necessary for entities to assess their going-concern presumption. For example, an entity that issues December 31, 20X3, financial statements on November 30, 20X4, currently needs to assess the going-concern presumption for one additional month (i.e., through December 31, 20X4). The new assessment period would require the entity to assess the going-concern presumption for an additional year from the issuance date (i.e., through November 30, 20X5).

    The Board noted that as a result of the change in the assessment period, entities would potentially need to obtain bank debt covenant waivers for an additional period (in the example above, an additional 12 months rather than 1 month). Entities would also need to change their forecasting to accommodate the period as modified, which may be a period that is not typically assessed.

  • Frequency of assessment — The Board affirmed its previous decision to require the going-concern assessment at each annual and interim reporting period.
  • Disclosure — The Board tentatively decided to include most of the disclosures proposed in the ED and certain disclosures contained in the current auditing standards (specifically, the requirements in PCAOB AU 341.11). Therefore, if an entity concludes that there is no substantial doubt about its ability to continue as a going concern but does so only after considering “management plans” to address any concerns, it will be required to disclose such circumstances (along with an explanation of management’s plans to mitigate the substantial doubt).
  • Nonpublic entities — The Board tentatively decided that the scope of the substantial-doubt assessment and disclosures should apply to both public and nonpublic entities.

Next Steps

The FASB staff will draft a final ASU and present it to the Board for further redeliberations in May 2014, after which the Board will address the issues that were not voted on at this week’s meeting, including the transition approach and the effective date.

The staff intends to perform additional outreach about the impact of changing the assessment period and to discuss with the Private Company Council’s board members the possibility of requiring private entities to provide the same disclosures about risks and uncertainties that are required of public entities.

Editor’s Note: The Board also mentioned that the PCAOB and the AICPA’s Auditing Standards Board may consider revising their auditing standards to conform to the FASB’s final ASU.


1 FASB Proposed Accounting Standards Update, Disclosure of Uncertainties About an Entity’s Going Concern Presumption.

2 See the AICPA’s Codification of Statements on Auditing Standards, AU-C Section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern; and PCAOB AU Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

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