Project Update

The Liquidation Basis of Accounting and Going Concern (Formerly Disclosures about Risks and Uncertainties)

Last updated on November 6, 2012. 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

Phase I: The objective of this phase of the project is to provide guidance about how and when an entity should apply the liquidation basis of accounting.

Phase II: The objective of this phase of the project is to provide guidance about (a) whether and how an entity should assess its ability to continue as a going concern and (b) if so, the nature and extent of any related disclosure requirements.

*Due Process Documents

Phase I: The Liquidation Basis of Accounting

On July 2, 2012, the FASB issued a proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205): The Liquidation Basis of Accounting, for a 90-day comment period. The comment period ended on October 1, 2012.

Exposure Draft

Comment Letters

Comment Letter Summary
 

Phase II: Going Concern

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 (May 2, 2012)

The Board also decided that it will 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 in light of its recent decision not to pursue going-concern-type disclosures in the project about liquidity and interest rate risk disclosures. The Board directed the staff to consider this question in the context of a separate phase of this project.

The effect of the Board’s decision is that the project has been divided into two separate and distinct phases.

For decisions related to The Liquidation Basis of Accounting, see minutes below.

Summary of Decisions Reached to Date

The Board has reached the following decisions based on discussions surrounding issues raised in comment letters on the Exposure Draft, in other outreach meetings, and in redeliberations.

Phase I: The Liquidation Basis of Accounting

See proposed Accounting Standards Update above.

Phase II: Going Concern

Project Objective

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:
  1. Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP
     
  2. The time horizon over which management would evaluate the entity’s ability to meet its obligations
     
  3. The type of information that management should consider in evaluating the entity’s ability to meet its obligations
     
  4. The effect of subsequent events on management’s evaluation of the entity’s ability to meet its obligations
     
  5. 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, the Board decided that to revisit in this project 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.

Superseded Tentative Decisions
 
Early Warning Disclosures

The Board previously decided to require certain early warning disclosures when management, applying commercially reasonable business judgment, is aware of conditions and events that indicate, based on current facts and circumstances, that it is reasonably foreseeable that an entity may not be able to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, issuance of equity, externally or internally forced revisions of its operations, or similar actions. Subsequently, the Board decided not to pursue these disclosures as part of this project because of questions about their incremental value over and above the liquidity risk disclosures that are being proposed in the financial instrument project.

Subsequent Events

If management were required to make a going concern assessment, the Board decided that management would update its assessment if a subsequent event that significantly affects the assessment occurs before the financial statements are issued or are available to be issued. The time horizon for the reassessment would be extended to include the foreseeable future beginning as of the date of the subsequent event. The determination of whether the related disclosures are required would be based on that updated assessment. The entity would still be required to apply the guidance in Topic 855, Subsequent Events, for recognition and disclosure of specified subsequent events.

Time Horizon

If management were required to make a going concern assessment, the Board decided that management should take into account available information about the foreseeable future, which is generally, but not limited to, 12 months from the end of the reporting period. Certain events that are expected to occur or are reasonably foreseeable beyond 12 months that would materially affect the assessment are considered part of the foreseeable future. The time frame beyond 12 months is limited to a practical amount of time thereafter in which significant events or conditions that may affect the evaluation can be identified. The Board decided to use this time horizon because it avoids the inherent problems that a bright-line time horizon would create and requires management to consider events or conditions occurring beyond the one-year time horizon that are significant and most likely would have to be disclosed. The Board does not intend for the assessment of the period beyond a year to be open ended or an indefinite period.
 
Next Steps

The Board will consider feedback received on the proposed Update during redeliberations on the liquidation basis of accounting (Phase I). The Board directed the staff to prepare materials for discussion at a future Board meeting about (a) whether and how an entity should conduct a going concern assessment and (b) if so, the nature and extent of any related disclosure requirements.

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.

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

Background Information

The U.S. guidance for when and how to apply the liquidation basis of accounting is located in the AICPA Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures, Section 9508, “Reports on Audited Financial Statements: Auditing Interpretations of Section 508,” and states that a liquidation basis of accounting may be considered GAAP for entities in liquidation or for which liquidation appears imminent. The objective of the liquidation basis of accounting is to provide financial statement users with relevant information about an entity’s resources and obligations by measuring and presenting assets and liabilities in the entity’s financial statements at the estimated amount of cash the entity expects to collect or the amount of cash the entity expects to pay to settle its obligations during the course of liquidation. Some constituents have expressed a need for accounting literature in this area because there currently may be diversity in practice.

Originally, the Board undertook this project to incorporate AICPA Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures, Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern,” (AU Section 341) into GAAP. AU Section 341 states that the auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

Contact Information

Brian North
Project Manager
bnorth@fasb.org

Daghan Or
Practice Fellow
dor@fasb.org

Kathryn Cantlon
Postgraduate Technical Assistant
kscantlon@fasb.org