Proposed accounting standards update on disclosures of uncertainties about an entity’s going concern presumption

Currently, there is no guidance in US GAAP about management’s responsibilities for evaluating or disclosing going concern uncertainties. There is also no guidance in US GAAP about when and how going concern uncertainties should be disclosed in an entity’s financial statement footnotes.

The proposed amendments would provide guidance in US GAAP about management’s responsibilities for evaluating an entity’s going concern uncertainties, as well as the timing and content of related footnote disclosures. An entity would evaluate going concern uncertainties by assessing the likelihood that the entity would be unable to meet its obligations as they become due within 24 months after the financial statement date.

An entity would evaluate going concern uncertainties at each annual and interim reporting period and start providing footnote disclosures when it is either:

  1. more likely than not that the entity will be unable to meet its obligations within 12 months after the financial statement date without taking actions outside the ordinary course of business; or
  2. known or probable that the entity will be unable to meet its obligations within 24 months after the financial statement date without taking actions outside the ordinary course of business.

In determining whether disclosures are necessary, an entity would assess information about conditions and events that exist at the date the financial statements are issued (or for a nonpublic entity the date that the financial statements are available to be issued). Mitigating conditions and events also would be considered. In determining whether disclosures are necessary, however, an entity would not consider the potential mitigating effect of management’s plans that are outside the ordinary course of business.

When the above disclosure threshold is met, an entity would disclose in the footnotes a description of

  1. the principal conditions and events that give rise to the entity’s potential inability to meet its obligations,
  2. the possible effects those conditions and events could have on the entity,
  3. management’s evaluation of the significance of those conditions and events,
  4. mitigating conditions and events, and
  5. management’s plans that are intended to address the entity’s potential inability to meet its obligations.

Disclosures may be less extensive in the early stages because available information may be limited. In subsequent reporting periods, disclosures may, depending on the circumstances, become more extensive as additional information becomes available about the conditions and events and about management’s plans.

Additionally, the proposed amendments would require an entity that is an SEC filer to evaluate whether there is substantial doubt about its going concern presumption. If there is substantial doubt, the entity would disclose that determination in the footnotes. Substantial doubt would exist if, after assessing existing conditions and events and after considering all of management’s plans (including those outside the ordinary course of business), the entity concludes that it is known or probable that it will be unable to meet its obligations within 24 months after the financial statement date. An entity that is not an SEC filer would not be required to evaluate or disclose whether there is substantial doubt about its going concern presumption but would be required to apply all of the other disclosure requirements within the proposed amendments.

The deadline for the submission of comments on the proposed standard was September 24, 2013.

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