Project Update
Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern)
Last updated on January 20, 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
The objective of this project is to determine: (1) whether GAAP should require management of an entity to assess whether that entity will be able to continue as a going concern on a look-forward basis, (2) if guidance about making the going concern assessment is introduced into GAAP, the manner by which an entity should conduct the assessment and the content of the disclosures that would be required should management conclude unfavorably, (3) if guidance about making the going concern assessment is not introduced into GAAP, the objective and content of an entity’s disclosures about risks and uncertainties, and (4) how and when an entity should apply the liquidation basis of accounting.
Due Process Documents
On October 9, 2008, the Board issued a proposed Statement, Going Concern, for a 60-day comment period. The comment period ended on December 8, 2008.
*Decisions Reached at Last Meeting (January 11, 2012)
The Board decided not to require that management of an entity assess whether there is substantial doubt about the entity’s ability to continue as a going concern. A majority of Board members observed that such a requirement would be difficult to apply and that users of financial statements would benefit to a greater extent from ongoing disclosures about risks and uncertainties than they would from disclosures that would be made only after management concludes that there is substantial doubt about an entity’s ability to continue as a going concern. As a next step in this project, the Board directed the staff to develop a principle for an entity to assess the adequacy of its disclosures about risks and uncertainties and to evaluate how the content of such disclosures could be improved.*Summary of Decisions Reached to Date (As of January 11, 2012)
The Board has reached the following decisions based upon discussions surrounding issues raised in comment letters received on the proposed FASB Statement, Risks and Uncertainties, and redeliberations at subsequent Board meetings.Project Objective
The Board decided not to require that management of an entity assess whether there is substantial doubt about the entity’s ability to continue as a going concern. A majority of Board members observed that such a requirement would be difficult to apply and that users of financial statements would benefit to a greater extent from ongoing disclosures about risks and uncertainties than they would from disclosures that would be made only after management concludes that there is substantial doubt about an entity’s ability to continue as a going concern.
The Board decided that improving disclosures that would serve as an early warning of an entity’s potential inability to continue as a going concern would not be an objective of this project. That decision was in part due to the Board recently deciding to add incremental disclosures about liquidity risk in the separate project on accounting for financial instruments.
Limited Life Entities
The Board decided to revise the definition of imminent to include a requirement that liquidation is imminent when significant management decisions are limited to those necessary to carry out the plan of liquidation, with other decision making being relatively insignificant.
Liquidation Basis of Accounting
The Board decided to provide the following principles-based guidance on the adoption and application of the liquidation basis of accounting.
- An entity should prepare financial statements on the going concern basis unless liquidation is imminent. Liquidation is imminent if (a) a plan of liquidation has been approved by the entity’s owners or (b) the plan to liquidate is being imposed by other forces and it is remote that the entity will become a going concern in the future. If liquidation is imminent, an entity’s financial statements shall be prepared on a liquidation basis.
- Liquidation basis financial statements should reflect relevant information about the value of an entity’s resources and obligations in liquidation. Such financial statements should consist of a “Statement of Net Assets in Liquidation” and a “Statement of Changes in Net Assets in Liquidation.” An entity that applies the liquidation basis of accounting should measure the items in its financial statements to reflect the actual amount of cash that the entity expects to collect or pay during the course of liquidation. This measurement should include, but is not limited to, recognition of (a) costs to dispose of assets or liabilities and (b) expense and income to be incurred through liquidation. The measurement bases and significant assumptions used should be disclosed.
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.
The Board directed the staff to develop a principle for an entity to assess the adequacy of its disclosures about risks and uncertainties and to evaluate how the content of such disclosures could be improved. Based on the Board’s discussions, this principle should provide entities with an objective for disclosing information about risks and uncertainties regardless of an explicit trigger. The staff will explore whether this objective could be achieved by providing a qualitative analysis in the context of an entity’s operations as a supplement to the proposed disclosures in the separate project on disclosures about liquidity and interest rate risk.
Please refer to the Current Technical Plan for information about the expected release date of the second 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 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 considering an entity’s ability to continue as a going concern is located in 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," and 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. This evaluation is based on knowledge of relevant conditions and events obtained from the auditing procedures performed during a financial statement audit. Some constituents have expressed a need for accounting literature that clarifies that an entity, as opposed to its outside accountants, should have the primary responsibility for assessing its ability to continue as a going concern.
Contact Information
Brian NorthAssistant Project Manager
bnorth@fasb.org
Bob Bhave
Project Manager
bbhave@fasb.org
Kari Carpenter
Postgraduate Technical Assistant
kcarpenter@fasb.org