The Financial Accounting Standards Board supported the requirement for management to assess whether a public company would be unable to meet its obligations to remain in business as a “going concern” at a board meeting this week. The decision clears up some of the debate in the market over whether it is indeed management’s role to make that kind of call or if it should fall on an auditor’s shoulders.
While the auditor will still have a role in assessing a company’s going-concern status, FASB’s vote this week outlined in practice where to draw the line between a company’s senior management and its auditors. FASB ruled that the assessment of a going concern is the responsibility of a company’s management, but the appropriateness of that assessment will still be up to the auditor to decide.
The vote brings the going-concern project closer to completion: a task that dates back to 2008 when the board issued an exposure draft about incorporating the concept of going concern into U.S. generally accepted accounting principles as well as how to determine when a company should disclose under GAAP whether there is “substantial doubt” over a firm’s going concern.
FASB launched the project because there were too many models for assessing a company’s going concern and for determining what kinds of information should be considered in that evaluation. Better guidance, the board maintained, will warn investors about any significant threats that could exist to a company’s assumption of its ability to remain in business.
There was one dissenter at the FASB meeting, however. While most staff and board members favored the requirement that management assess a company’s going concern, FASB member Daryl Buck noted his dissent before finally casting his vote with other members. “While I don’t disagree that management is capable of making a judgment on that, I don’t think that is going to be an unbiased judgment,” he said, noting that “management is always going to be more optimistic than would a disinterested unbiased party.”
Thus, Buck reasoned, “that unbiased party, i.e., the auditor, in the view of users of financial statements, is in a much better position to have credibility with making that call.” He added that when it comes to having a substantial doubt if a company will remain in business in the future, the assertion should be made by the auditor. “That’s the proper place for that to occur,” said Buck.
The board also opted to align the accounting standard more closely with auditing standards when considering how long the assessment should be. FASB unanimously agreed that the going-concern assessment should be made over a “reasonable period of time,” which it defined as 12 months from the specific date that a company prepares its balance sheet but not to exceed 24 months.
The move brings management’s assessment more in line with standards for auditing the going-concern assessment. “I see the benefits of bringing the requirements in auditing literature into the accounting literature so it is part of GAAP. I see the benefit of standardization and consistency,” added Buck.
The board also decided that the assessment should be made every reporting period, including interim reporting periods. But one concern Buck raised at this week’s meeting was that it may result in companies duplicating annual disclosure requirements during the interim reporting periods.
FASB chairman Leslie Seidman, however, cautioned that if companies fail to include disclosure requirements needed to determine going concern during interim reporting periods, they could end up delaying or putting off disclosure. “I don’t want an entity to think it should not start a disclosure in an interim period,” she said.
The board expects to have a revised exposure draft on going concern (called phase 2 in the Liquidation Basis of Accounting and Going Concern project) by March or April of 2013. A final standard would likely not be before Q4 2013, according to a FASB spokesperson.