Wednesday, February 18, 2009

Final Standards On Going Concern, Subsequent Events To Be Effective June 15

Final standards on Going Concern and Subsequent Events are expected to be issued by FASB by the end of March, and will carry an effective date of interim and annual periods ending after June 15, 2009, based on votes taken at the FASB board meeting earlier today.

The effective date above will apply to all companies, public and private.

Biggest Change from Current Practice: Removal of Bright Line for Going Concern
The standards generally move current requirements for assessing whether an entity is a going concern, and assessing the reporting impact of subsequent events- which are currently set forth in auditing literature originally established by the AICPA (and now, for public companies, by the PCAOB) -and moving those standards into FASB accounting literature or Generally Accepted Accounting Principles (GAAP). [NOTE: The action of moving these standards into the accounting literature is also related to FASB's codification project, in which all of GAAP will be codified into one searchable source. As noted in FASB's Dec. 2008 press release, the Codification is expected to be launched on July 1, 2009, following an extended verification period which began on Jan. 15, 2008.]

However, more than just moving existing standards for Going Concern and Subsequent Events from the auditing literature to the accounting literature, certain changes are being made to the current requirements, most notably, that the current requirement to assess going concern for a 12 month period is being changed to align more closely with international standards which do not have a 12 month bright line.

On this point, FASB board members were sympathetic with comment letters received on the Exposure Draft, saying it would be difficult to apply an ‘indefinite’ or ‘infinite’ time period to assess going concern, therefore the board agreed to use wording such that it would not appear their intent is for companies and their auditors to assess a companies’ likelihood of remaining a going concern over an ‘indefinite’ period.

However, the board also decided not to revert to a bright line 12 month (or some other number of months, such as 18 month) period, choosing to remain with a more principles based approach, and to address the concern that companies not make the assessment by considering, e.g. a 365 day window, if they know something significant is reasonably expected to happen on day 366 which would impact their assessment of the entity's ability to continue as a going concern.

To address concerns of commenters that the period to assess whether or not an entity is a going concern shoudl not be an 'indefinite' period of time, FASB agreed to insert wording in the final standard on Going Concern similar to this wording shown as alternative D in today's board handout:

“In assessing whether the going concern assumption is appropriate, management shall take into account available information about the future, which is at least, but not limited to, 12 months. The time period is designed to capture events occurring beyond twelve months which are reasonably foreseeable and materially affect the entity’s ability to continue to meet its obligations as they come due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions. To evaluate whether there are reasonably foreseeable events beyond twelve months, management shall take into account material information, significant assumptions and events which are available to the entity without undue cost and effort.”

Additionally, the staff may add some examples to illustrate the board’s intent and will work on wording to achieve the board's intent.

Board member Leslie Seidman suggested they consider including in the final standard an affirmative statement such as "It is not the board’s intent that management would have to forecast significantly into the future" in terms of complying with this standard.

We will post further highlights from FASB's board meeting in a summary on . For official results of FASB meetings, see FASB's Summary of Board Decisions posted by FASB in its News Center. Separately, as noted in our blog post earlier today, FASB Chairman Robert Herz also announced at the board meeting today that a number of new projects are being added to its agenda relating to Fair Value and other matters.

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Edith Orenstein said...

According to FASB's Summary of Board Decisions for the Feb. 18 meeting the board decided that in the final standard on Going Concern, the board will "provide guidance that defines a going concern," and will "clarify that the time period for the going concern assessment is not a bright-line 12 months but also is not intended to be an indefinite look-forward period." As I understood from listening to the webcast of the Feb. 18 board meeting, the 'clarification' that the time period is 'not intended to be an indefinite look-forward period' will use wording from 'appendix d' in the board handout, copied in the blog post above.

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