Project Update
Going Concern
Last updated on April 13, 2010. 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 incorporate into FASB literature guidance on (1) the preparation of financial statements as a going concern and an entity’s responsibility to evaluate its ability to continue as a going concern (2) disclosure requirements when financial statements are not prepared on a going concern basis and when there is substantial doubt as to an entity’s ability to continue as a going concern, and (3) the adoption and application of 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 (March 31, 2010)
The Board discussed changes to the proposed accounting model for management’s going concern assessment and whether and how to proceed with the liquidation basis of accounting portion of this project.The Board made the following decisions about management’s going concern assessment:
- The Board decided not to specifically define a going concern. Instead, the Board decided to require the following 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.
- Pertinent conditions and events giving rise to the assessment, including when such conditions and events are anticipated to occur, if reasonably estimable
- The possible effects of those conditions and events
- Possible discontinuance of operations
- Management’s evaluation of the significance of those conditions and events and any mitigating factors
- Management’s plans to mitigate the effects of the conditions and events, whether those plans can be effectively implemented, and the likelihood that such plans will mitigate the adverse effects.
- Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.
- 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.
*Summary of Decisions Reached to Date (As of 03/31/10)
The Board has reached the following decisions based upon discussions surrounding issues raised in comment letters received on the proposed FASB Statement, Going Concern, and redeliberations at subsequent Board meetings.Disclosure
The Board decided to require the following 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.
- Pertinent conditions and events giving rise to the assessment, including when such conditions and events are anticipated to occur, if reasonably estimable
- The possible effects of those conditions and events
- Possible discontinuance of operations
- Management’s evaluation of the significance of those conditions and events and any mitigating factors
- Management’s plans to mitigate the effects of the conditions and events, whether those plans can be effectively implemented, and the likelihood that such plans will mitigate the adverse effects.
- Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.
The Board decided that management shall 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, and 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.
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 directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The Board decided that the proposed Update will have a 60-day comment period and that the guidance should be applied prospectively.
Superseded Decisions
The Board previously decided to define the terms going concern and substantial doubt as they are used in AU Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, of the AICPA Codification of Statements on Auditing Standards and were to be incorporated into this project. However, the Board decided at the most recent Board meeting not to specifically define these terms.
*Next Steps
The Board directed the staff to draft a proposed Accounting Standards Update (Update).
Please refer to the Current Technical Plan for 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.
| *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.
Constituents have expressed a need for accounting literature that clarifies that an entity has the primary responsibility for assessing its ability to continue as a going concern. The Board agrees that accounting guidance related to the going concern assumption should be directed specifically to entities because it is the entity that is responsible for preparing its financial statements and evaluating its ability to continue as a going concern. Accordingly, the Board concluded that guidance related to the going concern assumption should reside in the accounting literature established by the FASB and decided to undertake this project.
Contact Information
Bob WorshekFASB Practice Fellow
rlworshek@fasb.org