Magazine article Strategic Finance

"Going Concern" Gone: Here's an Update on the Status of the FASB's Efforts to Incorporate "Going Concern" Guidance into U.S. GAAP

Magazine article Strategic Finance

"Going Concern" Gone: Here's an Update on the Status of the FASB's Efforts to Incorporate "Going Concern" Guidance into U.S. GAAP

Article excerpt

One sure sign that an entity is in financial trouble is an unfavorable "going concern" opinion from its auditor. Any indication of doubt regarding the entity's ability to continue as a going concern is certain to grab the attention of investors, creditors, and other users of the entity's financial statements.

For several years, the Financial Accounting Standards Board (FASB) has been interested in the significance of going-concern assessments. Over time, the Board has explored many ideas for incorporating guidance regarding going-concern assessments and related issues into U.S. Generally Accepted Accounting Principles (U.S. GAAP). In this month's column, I'll describe how the FASB has arrived at its current thinking on these matters.

Background

Under U.S. GAAP, there are two bases of accounting: going concern and liquidation. But U.S. GAAP provides no guidance to financial-statement preparers on how to assess an entity's ability to continue as a going concern or on when it's appropriate to use one basis of accounting vs. the other.

Although U.S. GAAP lacks going-concern guidance, such guidance is contained in U.S. Generally Accepted Auditing Standards (U.S. GAAS). Specifically, going-concern guidance is found in the American Institute of Certified Public Accountants' (AICPA) codification of Statements of Auditing Standards (SAS), which largely have been adopted by the Public Company Accounting Oversight Board (PCAOB) on an interim basis. In particular, AU Section 341, "The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern," states that the auditor of an entity's financial statements is responsible for evaluating 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. Furthermore, the auditor's evaluation must be based specifically on knowledge of relevant conditions and events obtained from the auditing procedures performed during a financial statement audit, effectively excluding knowledge that the auditor might obtain from other sources.

Interestingly, AU Section 341 doesn't define what a going concern is but does define what a going concern isn't. If the auditor has "substantial doubt about the entity's ability ... to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions," then the entity ordinarily wouldn't be considered able "to continue as a going concern."

The FASB Takes Notice

Even before the recent financial crisis, the FASB's constituents expressed a need for U.S. GAAP to make an entity's management responsible for assessing the entity's ability to continue as a going concern. Constituents also expressed a need for U.S. GAAP to provide guidance on how management should perform going-concern assessments. And constituents asked for U.S. GAAP to include more guidance on when an entity should apply the liquidation basis of accounting and how costs of liquidation should be presented in the financial statements.

Responding to its constituents, the FASB added the "Going Concern and Liquidation Basis of Accounting" project to its standards-setting agenda in May 2007. Later that year, the Board integrated the project into its "Codification and Retrieval" project. After considerable deliberation, the Board published an exposure draft (ED) of a proposed Statement of Financial Accounting Standards (SFAS), Going Concern, in October 2008. The proposed Statement would have applied to any business entity or not-for profit entity that prepares financial statements in accordance with U.S. GAAP.

The FASB's proposed SFAS incorporated the going-concern guidance from AU Section 341, modified to align the guidance with International Financial Reporting Standards (IFRS). …

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