Last week, the Financial Accounting Standards Board issued a proposal aimed at improving disclosures of uncertainties related to an organization’s ability to continue as a going concern.

The proposed guidance on the disclosure of going concern uncertainties would apply to all reporting organizations, including public companies, private companies, and nonpublic not-for-profit organizations.

Additionally, a public company that is a Securities and Exchange Commission filer would be required to evaluate and determine whether there is substantial doubt about its ability to continue as a going concern and, if there is substantial doubt, disclose that determination in statement footnotes.

FASB asked stakeholders to review and provide comments on the proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, by September 24, 2013.

In a statement, FASB Chair Leslie F. Seidman, explained the impetus for the proposal. “Stakeholders have expressed concerns about diverse practices that have arisen in the financial statement footnotes about uncertainties surrounding an organization’s ability to continue as a going concern—that is, its ability to continue to operate such that it will be able to realize its assets and meet its obligations in the ordinary course of business,” Seidman said.

“This proposal seeks to address those concerns by clarifying management’s responsibilities about evaluating and disclosing going concern uncertainties, while improving the timeliness and quality of footnote disclosures about them.”

Under U.S. generally accepted accounting principles (GAAP), financial statements are prepared under the inherent presumption that the reporting organization will be able to continue as a going concern. The going concern presumption is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.

Currently, there is no guidance in U.S. GAAP about management’s responsibilities in evaluating or disclosing going concern uncertainties, or when or how uncertainties should be disclosed in an organization’s footnotes.

The proposal would provide this guidance, incorporating many of the principles that are currently in the auditing standards. Under the proposed guidance:

(1) Management is required to evaluate going concern uncertainties more frequently

(2) There is a threshold and related guidance for starting disclosures

(3) The assessment period is 24 months after the financial statement date

(4) There is a threshold for SEC filers to determine whether there is substantial doubt about an organization’s ability to continue as a going concern.

The proposal—including instructions on how to submit comments—and a FASB in Focus document are available on the FASB website at www.fasb.org.

Source: The Financial Accounting Standards Board