FASB Issues Guidance to Improve Financial Reporting of Going Concern Uncertainties

Going concern concept refers to the ability of a company to continue operating for the foreseeable future (next 12 months). Assumptions are being used to establish whether the entity is a going concern or not. If an entity establishes that it is actually a going concern, it has to prove that the assumptions used are reliable and all these assumptions need to be disclosed in financial statements of the entity. In the case when the entity does not seem to be going concern, it has to be appropriately disclosed again in the financial statements and financial statements need to be prepared on a break-up basis.

On Wednesday, Financial Accounting Standards Board (FASB) announced a change in the accounting standard on Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This change has a purpose to express management’s duty to establish whether the entity is a going concern or whether there are any uncertainties about entity’s capability to continue as operative, and to provide a set of disclosures describing the assumptions used regarding evaluation of going concern.

At present, there is little guidance on management’s responsibility to establish if there are any uncertainties found and to disclose these in the notes to financial statements. This new change helps out management understanding how to disclose the uncertainties in financial statements notes appropriately, with relevant matters.

FASB Technical Director, Susan Cosper, stated that the update would have made the assumptions and their disclosures alike, easing the comparison to be done. This ease in comparability leads to the improved understanding of shareholders and hence it increases their confidence.

This change is applicable to all companies including non-profits, and application is mandatory from 16 December 2015. It allows early adoption as well.