Academic journal article Review of Business

An Analysis of the FASB's New Going-Concern Standard and Its Relation to Liquidation Basis Accounting Requirements

Academic journal article Review of Business

An Analysis of the FASB's New Going-Concern Standard and Its Relation to Liquidation Basis Accounting Requirements

Article excerpt

INTRODUCTION

Transparency in financial reporting significantly influences capital-market efficiency as decision makers use the information presented in financial statements to make investment decisions. Hence, the importance of reliable financial reports, that fairly reflect the financial condition of an entity, cannot be overstated. One of the most fundamental accounting assumptions underlying the preparation of financial statements is the going-concern assumption.

The going-concern assumption presumes that an entity will be able to realize its assets and meet its financial obligations when they become due for a reasonable time into the future. Accordingly, general-purpose financial statements are prepared using the going-concern basis of accounting (traditional accrual accounting). Investors, creditors, and analysts use this financial information to evaluate current performance and make predictions about the future performance of an entity.

If, however, an entity is not expected to continue operating as a going concern and its liquidation is imminent, use of the liquidation basis of accounting is required for the preparation of financial statements to provide relevant information to investors about the expected resources available after liquidation.

Given the critical importance of an entity's ability to continue as a going concern for capital-investment decisions, when and how should this information be communicated to interested parties to make it most decision useful? For example, even before an entity's liquidation is imminent, uncertainties may exist about the entity's ability to continue as a going concern that would be relevant to investors.

The question is, how much of this information should be publicly disclosed? In the past, if auditors expressed uncertainty about the validity of the going-concern assumption, but the entity's management implemented a plan to alleviate the problem, this information was not communicated to the investing public.

U.S. accounting standards have not, until recently, adequately addressed these important issues regarding the going-concern assumption. To close this gap in the standards, the FASB recently completed a two-phase project that resulted in the issuance of two Accounting Standards Updates: ASU No. 2014-15, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, issued on August 27, 2014; and ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, issued on April 22, 2013.

The purpose of this paper is to analyze the major provisions of the going-concern standard update and its relationship to the liquidation basis of accounting. We also present results of an analysis of the feedback from various constituents who commented on the FASB Exposure Draft and present important unanswered questions related to the cost-benefit of the new standard, the effect on the capital markets of implementation of the amendments, and the impact of the new disclosure requirements on U.S. auditing standards.

GOING-CONCERN STANDARD UPDATE

Background

The issuance of financial statements prepared using the going-concern basis of accounting signals to users of the information that an entity expects to continue its operations into the foreseeable future. To assure investors that the going-concern assumption is valid, recent updates have been made to generally accepted accounting principles (GAAP).

The revised standard provides guidance on going-concern issues, including management's responsibility to assess going-concern uncertainties, when and how such uncertainties should be disclosed in the financial statement footnotes, and when to use the liquidation basis of accounting to prepare financial reports.

Prior to issuance of the standards update, responsibility for evaluating the going-concern assumption resided solely with an entity's independent auditor, in accordance with U. …

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