Project Update
Going Concern
Last updated on February 12, 2013. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
Project Objective
Due Process Documents
*Decisions Reached at Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
*Contact Information
Project Objective
The objective of this project is to provide guidance about (a) how an entity should assess its ability to continue as a going concern and (b) the timing, nature and extent of any related disclosure requirements.
Due Process Documents
On October 9, 2008, the Board issued an Exposure Draft, Going Concern, for a 60-day comment period. The comment period ended on December 8, 2008.
Exposure Draft
Comment Letters
Comment Letter Summary
*Decisions Reached at Last Meeting (January 31, 2013)
The Board made the following decisions related to an entity’s going concern assessment and disclosures:Disclosure Threshold
The Board decided that management should provide disclosures when existing events or conditions indicate that it is more likely than not that the entity may be unable to meet its obligations within a reasonable period of time from the financial statement date. The assessment would not consider the mitigating effect of management plans that are outside the ordinary course of business. Because the assessment is inherently judgmental, the Board intends more likely than not to be viewed as an approximate benchmark for starting disclosures and not as a bright-line threshold. The proposed standard will include example indicators to help management in assessing the need for disclosures.
Definition of Outside the Ordinary Course of Business
The Board decided to define outside the ordinary course of business as follows:
“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 be considered outside the ordinary course of business when assessing the need for disclosures.”
The proposed standard will include examples of management plans that are outside the ordinary course of business.
Disclosure Principle
Consistent with the disclosure considerations outlined in present auditing standards, the proposed standard would require an entity to disclose sufficient information to enable users to understand the principal events giving rise to an entity’s potential inability to meet its obligations, their possible effects, and management’s plans.
Applicability to Nonpublic Entities
In previous deliberations, the Board had decided that management would assert in the financial statements that there is substantial doubt about an entity’s ability to continue as a going concern when the likelihood of the entity’s inability to meet its obligations within a reasonable period of time reaches probable. The Board decided that nonpublic entities would not be required to make a substantial doubt assertion. Nonpublic entities would still be required to apply all other provisions and disclosures of the new model.
Transition and Other Matters
The Board tentatively decided that an entity would apply the proposed guidance prospectively. The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The proposed Update will have a 90-day comment period.
*Summary of Decisions Reached to Date (As of February 12, 2013)
The Board decided to adopt a new financial reporting model for management’s assessment of going concern, and related disclosures. The following represents the Board’s decisions pertaining to the new financial reporting model.At each reporting period, management would assess an entity’s potential inability to continue as a going concern and the need for related disclosures. In doing so, management would consider the likelihood of an entity’s potential inability to meet its obligations as they become due for a reasonable period of time.
Management would start providing disclosures in its financial statements when existing events or conditions indicate it is near more likely than not that the entity may be unable to meet its obligations in the ordinary course of business, within a reasonable period of time from the balance sheet date. In assessing the need for disclosures, the mitigating effect of management’s plans would be considered unless such plans involve actions that are outside the ordinary course of business.
Management would assert in the financial statements that there is substantial doubt about an entity’s ability to continue as a going concern when the likelihood of the entity’s inability to meet its obligations within a reasonable period of time reaches probable. In evaluating the need for this assertion, management would consider the effect of all management plans.
In performing the 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. Reasonable period of time would represent 12 months from the financial statement (period end) date. In addition, the assessment would consider the effect of existing events or conditions that are probable of resulting in an entity’s inability to meet its obligations beyond the initial 12 months. Reasonable period of time would be limited to a practical amount of time in which the future impact of existing events or conditions can be identified, not to exceed a period of 24 months from the period end date.
*Next Steps
The staff is drafting a proposed Accounting Standards Update. Please see the Current Technical Plan for more information about the expected release date of the exposure document.
*Board/Other Public Meeting Dates
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.
The following are links to the minutes for each meeting.
| *January 31, 2013 | Board Meeting—Project Scope and Objective |
| November 7, 20121 | Board Meeting—Project Scope and Objective |
| May 2, 2012 | Board Meeting—Liquidation Basis of Accounting and Project Objective |
| February 15, 2012 | Board Meeting—Liquidation Basis of Accounting |
| January 11, 2012 | Board Meeting—Project Scope and Objective |
| October 26, 2011 | Board Meeting—Project Scope and Objectives |
| December 1, 2010 | Board Meeting—Subsequent Events and Limited Life Entities |
| November 10, 2010 | Board Meeting—Issues Raised by External Reviewers |
| March 31, 2010 | Board Meeting—Disclosure Threshold and Liquidation Basis |
| January 13, 2010 | Board Meeting—Project Scope |
| June 3, 2009 | Board Meeting—Analysis of Additional Constituent Outreach |
| February 18, 2009 | Board Meeting—Comment Letter Discussion |
| August 27, 2008 | Board Meeting—Codification Discussion |
| September 19, 2007 | Board Meeting—Removal from Board agenda |
| May 30, 2007 | Board Meeting—Add Project to Board agenda |
1Note: Starting with the November 7, 2012 Board Meeting, this table will only list public meetings related to Going Concern. |
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Background Information
During initial deliberations, the Board decided to develop guidance that would require an entity’s management to evaluate the entity’s ability to continue as a going concern and require disclosures when either financial statements are not prepared on a going concern basis or there is substantial doubt about the entity’s ability to continue as a going concern.
In October 2008, the Board issued an Exposure Draft, Going Concern. The Board received 29 comment letters in response to that Exposure Draft, and respondents’ comments were considered by the Board during redeliberations. The Board decided that the following matters warranted further deliberations:
- Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP
- The time horizon over which management would evaluate the entity’s ability to meet its obligations
- The type of information that management should consider in evaluating the entity’s ability to meet its obligations
- The effect of subsequent events on management’s evaluation of the entity’s ability to meet its obligations
- Whether to provide guidance on the liquidation basis of accounting.
The Board then modified the objective of the project to require an entity to provide earlier disclosures (early warning disclosures) as it became increasingly likely that the entity would be unable to meet its obligations as they become due. This objective replaced the project’s initial objective of incorporating AU 341 into U.S. GAAP because the Board came to believe that users of financial statements would benefit more from ongoing and incremental disclosures about risk than they would if such disclosures were required only when management concluded that there was substantial doubt about the entity’s ability to continue as a going concern. Because of comments from stakeholders that the guidance about when and how an entity should apply the liquidation basis of accounting was unclear, the Board also added a separate objective to provide guidance related to that topic.
Before the Board commenced its redeliberations on this project, it added a separate project to its agenda (as part of the accounting for financial instruments project) about improving disclosures about liquidity and interest rate risk. During the outreach phase of the project on going concern and the liquidation basis of accounting, many users of financial statements commented that sufficient liquidity is the most critical factor when assessing an entity’s ability to continue as a going concern. Given the similarities between the early warning disclosures in this project and the disclosures proposed in the separate project about liquidity and interest rate risk, the Board decided that those disclosures were unnecessary and that they would no longer be an objective of this project.
The Board then decided not to pursue going concern-type disclosures in the separate project about liquidity and interest rate risk disclosures. In light of that decision, at the May 2, 2012 Board Meeting, the Board decided to revisit the question of whether management should be required to assess whether there is doubt about an entity’s ability to continue as a going concern. The Board directed the staff to consider this question in the context of a separate phase of the project. As a result, the project was divided into two separate and distinct phases.
The staff has reframed the objective of the project to bring increased consistency and structure to the existing going concern reporting model and disclosures, by providing management with guidance on the timing, nature and extent of disclosures. On November 7, 2012, the Board voted on a proposed model which is further described above in the Decisions Reached section of the page.
After the November 6 and 7, 2012 Board Meetings, the two phases have been further separated into two individual project pages. See the Liquidation Basis of Accounting project page here.
*Contact Information
Daghan OrPractice Fellow
dor@fasb.org
Libby Van Wagenen
Postgraduate Technical Assistant
lvanwagenen@fasb.org