At today’s Financial Accounting Standard Board (FASB) meeting the FASB completed deliberations on several topics. Two of the more important conclusions regarded going concern and fair value disclosure requirements for nonpublic entities.
The Board instructed the FASB Staff to draft a proposed Accounting Standard Update (ASU) to be issued for public comment regarding going concern. The ASU would require management to assess the entity’s ability to continue as a going concern as of each reporting date. If existing events or conditions indicate it is more-likely-than-not that the entity may not be able to meet its obligations within a reasonable period of time from the reporting date (date of the balance sheet), disclosures would have to be provided.
The more-likely-than-not threshold is lower than the probable threshold. In other accounting guidance, it is generally interpreted to mean great than a 50% chance of occurrence, while probably is considered much higher. Currently, there are no specific requirements in GAAP for such an assessment. Most of the current guidance around going concern considerations is found in the audit guidance.
If the ASU is eventually adopted, and we believe it will be, look to the auditing bodies, specifically the PCAOB and the Auditing Standards Board (of the AICPA) to issue revised auditing guidance regarding going concern.
Nonpublic Entities and Fair Value Disclosure Requirement
When ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, was issued, it contained a requirement to disclose the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)‖for financial instruments where fair value is required to be disclosed. This was required even for financial instruments that were not required to be measured at fair value in the balance sheet.
The FASB has affirmed that this disclosure requirement is not applicable to nonpublic entities. With this decision, the FASB shows an emerging understanding that the reporting requirements of nonpublic financial statements will not always be the same as public companies. Given this recent trend, preparers of nonpublic financial statements can take encouragement that their concerns are being heard. We will continue to monitor these developments.
For more information about complex accounting and disclosure requirements such as FASB deliberations, or other accounting developments, please email Bill Godshall, Lead Quality Control Partner and leader of our Public Company Audit and Advisory Practice at firstname.lastname@example.org.