FASB’s Proposal for Going Concern Uncertainties: A New Layer of Accounting Guidance for Management

MHMMessenger

October 2013
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M

A publication of the Professional Standards Group

FASB’s Proposal for Going Concern Uncertainties: A New Layer of Accounting
Guidance for Management
The FASB’s latest proposal on going concern
uncertainties introduces a new layer of accounting
guidance that adds to the existing requirements set
by auditing standards and SEC regulations. The
proposed new guidance responds to a wave of
unwelcome surprises, as scores of companies faced
unexpected liquidity problems during an economic
downturn that adversely affected businesses while
the FASB’s previous (2008) proposal was sidetracked
by other priorities. The added guidance may not
eliminate these kinds of surprises altogether, but it
provides a more systematic approach that is designed
to promote more consistency in the nature and timing
of disclosures about an entity’s ability to continue as
a going concern. This Messenger summarizes the
proposal, along with the questions, suggestions, and
concerns cited in comment letters.

The proposed approach
The FASB’s proposed approach describes how
management should evaluate going concern
uncertainties and what information should be provided
in the footnotes to the financial statements. The
proposal introduces new definitions and disclosure
thresholds, along with scalable reporting requirements
that would allow the disclosures to evolve as the level
of financial stress increases. These requirements

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generally would apply to all entities that use US
GAAP, though some disclosures would apply only to
SEC filers that use US GAAP.
Below is an overview of the steps that would be
required under the new approach.
1. Determine if the entity is required to use the
liquidation basis of accounting. There is an
inherent presumption under US GAAP that the
reporting entity will be able to continue as a going
concern. The proposed guidance would define
a “going concern” as an entity that will continue
to operate by realizing its assets and meeting its
liabilities in the ordinary course of business. If
this is not the case and liquidation is considered
imminent, then the entity would use the liquidation
basis of accounting instead, starting when certain
events occur. Our Substance of the Standard on
“FASB Finalizes Standard on Liquidation Basis of
Accounting” provides more details on when and
how this basis should be applied. (http://www.
mhmcpa.com/Portals/0/PDF/Substance/SoSFASB-Finalizes-Standard-on-Liquidation-Basisof-Accounting.pdf)
2. Determine whether going concern disclosures
are necessary. At each annual and interim
reporting date, management would assess
the risk that the entity may not be able to meet
its obligations as they come due within 24
months after the financial statement date. This
assessment would consider all the information
about conditions and events that exist at the

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date the financial statements are issued (or for a
nonpublic entity the date the financial statements
are available to be issued). Examples of relevant
information are provided in the Appendix to
this Messenger. For purposes of this step, the
guidance would not permit consideration of the
mitigating effects of any of management’s plans
that are outside the ordinary course of business.
Disclosures would be required if the answer is yes
to either of the following two questions.
a. Is it 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?
b. Is it 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?
3. Provide
the
required
going
concern
disclosures. If Step 2 indicates that disclosures
are necessary, the disclosures would need to
provide information that enables users of the
financial statements to understand all of the
following:
a. The principal conditions and events that give
rise to the entity’s potential inability to meet its
obligations.
b. The possible effects that those conditions and
events could have on the entity.
c. Management’s evaluation of the significance
of those conditions and events.
d. Mitigating conditions and events.

e. Management’s plans that are intended to
address the entity’s potential inability to meet
its obligations.
4. For SEC filers, determine if there is substantial
doubt about the going concern presumption.
The determination of substantial doubt would be
similar in scope to the determination in step 2 in
that it would encompass events and conditions of
the types listed in Tables 1 and 2 of the Appendix
to this Messenger. But this step would differ from
step 2 in that it would permit consideration of the
effects of all of management’s plans that are likely
to be effectively implemented and that are likely
to mitigate the adverse conditions and events,
including the mitigating effect of management’s
plans that are outside the ordinary course of
business.
5. If there is substantial doubt, provide the
required disclosures for the SEC filer.
When Step 4 indicates that disclosures about
substantial doubt are necessary for an SEC filer,
the disclosures would need to specifically state
that there is substantial doubt through the use of
the phrase “there is substantial doubt about the
entity’s ability to continue as a going concern
within 24 months after the financial statement
date” or similar wording that includes the terms
“substantial doubt” and “ability to continue as
a going concern” or “ability to prepare financial
statements under the going concern presumption.”
Some of these steps introduce inconsistencies with
the existing US auditing standards and with IFRS.
Other standard-setters may consider changes in
this area in the future. Currently, the PCAOB is
considering a proposal that would expand the audit
report for public companies to include a section on
“critical audit matters” where the auditor can provide
additional insights into the most challenging audit
issues, including the auditor’s conclusions regarding
going concern matters. See MHM Messenger 17-13

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(http://www.mhmcpa.com/articles/vw/1/itemid/438.
aspx) for more details of the PCAOB’s proposal. The
PCAOB has indicated it may consider other changes
related to going concern after the FASB completes its
project.
A summary of key differences from current IFRS
standards, US auditing standards, and SEC
regulations is provided in Table 3 of the Appendix to
this Messenger.

Open questions and concerns
The FASB’s proposal was approved by a divided Board
in January 2013, with two Board members dissenting.
The exposure draft indicates the dissenting members
had concerns that: (a) the two separate disclosure
thresholds in Step 2 would be too difficult to implement
and audit, and (b) the proposal would not represent
an improvement over current reporting requirements
for SEC filers. The comment letters expressed similar
concerns.
Below are highlights of some of the major themes
expressed in the comment letters.
• Complexity and practicality of scalable disclosures.
Many commentators expressed concerns about
added complexity, especially with regard to the
scalable disclosures that would introduce a morelikely-than-not disclosure threshold. Accountants
are familiar with the application of a “more-likelythan-not” criterion to specific transactions or
specific line items on financial statements. But this
degree of precision could prove more challenging
to apply to the overall state of the entity. Because
the term “more likely than not” is defined in US
GAAP as a likelihood of greater than 50 percent,
the determination could involve “close calls”
regarding whether an entity is able to continue as
a going concern or not.

• Legal implications. The proposal would have
legal implications because it would result in the
movement of certain forward-looking statements
from the MD&A (where the statements are
covered by legal safe harbors) to the footnotes
(where they are not covered by safe harbors). This
would expand the legal liability for companies,
management, boards of directors, and auditors.
There are risks that it might lead to secondguessing in shareholder litigation, auditor
inspection findings, and regulatory enforcement
actions for SEC filers that issue quarterly financial
statements, thereby putting public companies at a
disadvantage compared with non-filers that do not
issue interim financial statements.
• Other unintended consequences. The proposed
footnote disclosure requirements might have other
unintended consequences for private companies
as well, such as providing sensitive information that
would cut off their access to loans and constitute a
self-fulfilling prophecy of defeat. The requirements
might also have unforeseen consequences for
public companies, such as promoting disclosure
overload and boilerplate disclosures instead of
information that investors find helpful for decisionmaking.

Diverse views on desirable changes
The comment letters reflect diverse schools of thought
regarding the changes that are needed to the FASB’s
2013 proposal. The key points made in the letters
include the following suggestions.
1. Just incorporate the existing guidance in
auditing standards. To avoid the potential legal
implications and other unintended consequences,
some accountants believe the FASB should
limit its guidance to a simple codification of the
requirements of the existing US auditing standards,
rather than add a new layer of accounting guidance
that requires forward-looking statements in
footnotes to financial statements. Some suggest

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the Board should defer to the SEC to set the
disclosure requirements for SEC filers, and
any changes needed to promote consistency of
disclosures across public and private companies
might best be handled through an update to the
required disclosures regarding business risks and
uncertainties, rather than creating a new set of
going concern disclosures.
2. Add flexibility for “close calls.” Other accountants
believe the FASB’s approach could be helpful,
but they say the scalable disclosure requirements
need to be modified so they are less challenging
to apply. One way to do this might be to shorten
the time horizon. Another way might be to redefine
the more-likely-than-not disclosure threshold as a
range, so that management and auditors can more
effectively consider all the factors, both qualitative
and quantitative, before an entity reaches the
stage where there is substantial doubt about its
ability to continue as a going concern.
3. Require substantial doubt disclosures for all
entities. Some accountants believe the substantial
doubt disclosures should apply to both SEC filers
and other entities for greater consistency with
current requirements of the existing US auditing
standards. The letters say the FASB’s basis for
conclusions does not adequately explain why
there are different standards for SEC filers and
other entities.

the FASB’s proposal, most accountants seem to
be concerned about the need for coordination and
a smooth resolution of any inconsistencies prior
to the effective date. A common theme is that the
FASB’s guidance should be issued concurrently
with revised auditing standards.
5. Provide additional clarification. Some letters
request more guidance or clarification in
certain areas. For example, in our letter, MHM
requested more guidance to clarify the meaning
of management plans that are in the “ordinary
course of business.” Other letters suggest the
footnote disclosures should be limited to factual
information that can be supported and verified,
rather than a discussion of possible future events.

For more information
MHM’s Professional Standards Group will continue to
monitor progress on the FASB’s and related proposals
on going concern issues. Our comment letter is
available on the FASB’s website. If you would like
additional information about the proposed changes,
please contact Ernie Baugh of MHM’s Professional
Standards Group or your MHM service professional.
You can reach Ernie at ebaugh@mhm-pc.com or
423-870-0511.

4. Issue concurrently with updated auditing standards.
Almost all respondents to the exposure draft
mentioned potential problems associated with the
interaction of the FASB’s proposal with existing US
auditing standards and/or international accounting
standards. Although other standard-setters have
said they may consider changes in response to

The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.

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MHM Messenger 18-13 Appendix: FASB’s Proposal for Going Concern Uncertainties
Relevant Conditions and Events to be Evaluated When Assessing an Entity’s Ability to
Continue as a Going Concern
Table 1. Relevant Conditions and Events
Under the FASB’s 2013 proposal on going concern uncertainties, the conditions and events to be considered in the
going concern assessment would include the following:
a. Sources of liquidity, including available liquid funds and available access to credit.
b. Funds necessary to maintain operations in the ordinary course of business.
c. Conditional and unconditional obligations due or anticipated within 24 months after the financial statement date.
d. Conditions and events that could adversely affect the entity’s ability to meet its obligations. Examples: the
anticipated loss of a major customer, the impending maturity of significant debt, or the upcoming expiration of a
key patent. See Table 2 for more examples.
e. Conditions and events that could mitigate the entity’s potential inability to meet its obligations. Examples: the
recent renewal of a major customer contract, a reduction in the costs of raw materials, or an increase in market
demand for the entity’s products.
f. The effect of management’s plans that are in the ordinary course of business. Those plans that are deemed to be
within the ordinary course of business shall be considered only if they are likely to be effectively implemented and
likely to mitigate the adverse conditions and events.

Table 2. Examples of Adverse Conditions
The following are additional examples of the adverse conditions and events mentioned above (in part d of Table 1)
that may result in an entity’s potential inability to meet its obligations.
a. Negative trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from
operating activities, and adverse key financial ratios.
b. Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages
in dividends, denial of usual trade credit from suppliers, restructuring debt to avoid default, noncompliance
with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of
substantial assets .
c. Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success
of a particular project, uneconomic long-term commitments, and a need to significantly revise operations.
d. External matters that have occurred, for example, legal proceedings, legislation, or similar matters that might
jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or
supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.
Note: The determination of whether there is substantial doubt and disclosures are necessary would depend on an
assessment of all information about conditions and events in the aggregate, including mitigating conditions and
events. The existence of one or more of the above conditions would not necessarily indicate that there is substantial
doubt about the entity’s going concern presumption. Similarly, the absence of those conditions would not necessarily
indicate that substantial doubt does not exist.

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Summary of Key Differences with Other Standards and Regulations
Table 3. Comparison with IFRS, Existing US Auditing Standards and SEC Regulations
Highlights of the main similarities and differences between the current guidance and the existing IFRS standards,
SEC regulations, and auditing standards, are as follows.
A. Comparison with IFRS
The requirements for IFRS differ in several respects from the FASB’s proposal. However, the IASB is in the
process of clarifying the requirements for IFRS and may make changes as part of that process.
Current differences with the FASB’s proposal include: (1) IFRS does not provide guidance on the liquidation
basis of accounting. Instead, it simply requires that the reporting entity disclose the basis of preparation used. (2)
IFRS uses a single threshold for disclosures of going concern uncertainties instead of the two proposed by the
FASB. (3) IFRS sets a minimum for the period of time to be evaluated (12 months from the date of the financial
statements), but it does not limit the period of time to be evaluated to 24 months from the date of the financial
statements as the FASB’s proposal does.
B. Comparison with US auditing standards
The current US auditing literature requires that auditors assess the possible financial statement effects of
uncertainties about an entity’s ability to continue as a going concern. The FASB’s proposal would introduce
several changes, including the following:
• More frequent assessments for companies that issue interim financial statements. Existing auditing
standards require that audit reports reflect an evaluation of management’s assumption about a company’s
ability to continue as a going concern. But audit reports are typically issued only once a year. The FASB’s
proposed guidance would require assessments by management for interim as well as annual periods. This
could result in more timely disclosures for investors and other users of financial statements.
• Longer horizon for assessments. Current auditing standards require that the auditor’s report highlight
material going concern uncertainties, meaning when there is substantial doubt about the entity’s ability
to continue as a going concern for a “reasonable period of time.” The term “reasonable period of time” is
defined as a period not to exceed one year beyond the date of the financial statements being audited. The
“basis for conclusions” section of the FASB’s proposal indicates the Board decided to extend that period of
time to accommodate current practice. The FASB’s research indicates that some entities voluntarily disclose
in the footnotes going concern uncertainties that go beyond one year.
• Scalable horizon-based disclosure thresholds. The FASB’s proposal attempts to bridge the gap in the
assessment periods between auditing standards and certain current practices by setting scalable horizonbased disclosure thresholds. These thresholds use more stringent probability thresholds for the later stages
of the assessment period, (i.e., the trigger for required disclosures in Step 2 is when it is “more likely than
not” the entity will be unable to meet its obligations in the first 12 months following the financial statement
date, while the threshold increases to “probable” when the horizon extends to the full 24 months following the
financial statement date).


Table 3. Comparison with IFRS, Existing US Auditing Standards and SEC Regulations
C. Comparison with SEC rules
The FASB’s proposed changes are not intended to expand upon the requirements of current SEC rules. But the FASB
expects its guidance would result in more consistency in the nature and timing of footnote disclosures for all entities,
including SEC filers as well as private companies and not-for-profit entities.
Currently, SEC filers are required to discuss factors related to going concern issues in the sections of their reports on
the MD&A and risk factors.
• MD&A. Item 303(a) of Regulation S-K requires that SEC registrants disclose in the Management Discussion
& Analysis (MD&A) sections of their annual reports on Form 10-K information about trends and uncertainties
that are reasonably likely to have a material effect on the registrant’s liquidity, capital resources, and results of
operations.
• Risk Factors. Item 503(c) of Regulation S-K requires the disclosure of risk factors that can help users of financial
statements with their evaluation of going concern uncertainties.
In practice, it seems feasible that the addition of a new layer of requirements in US GAAP would result in a tiered
approach to disclosures for SEC filers. The financial statement disclosures would contain the significant conditions
and events described in the FASB’s guidance, while the MD&A and risk factors would provide more information about
the potential causes and effects of going concern uncertainties.


FASB’s Proposal for Going Concern Uncertainties: A New Layer of Accounting Guidance for Management

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FASB’s Proposal for Going Concern Uncertainties: A New Layer of Accounting Guidance for Management