On June 26, 2013, the FASB issued an exposure draft of a proposed Accounting Standards Update (ASU) that would require both reporting companies and non-reporting entities that prepare US GAAP financial statements to evaluate uncertainties about their ability to continue as a going concern. The proposed ASU would require companies to make related financial statement footnote disclosure under certain circumstances.

Under US GAAP, financial statements are prepared with the background assumption that the reporting entity will continue to operate for the foreseeable future, as opposed to stopping its operations and liquidating. This is important because if an entity is going to be liquidating in the near future, its financial statements should be prepared on a different basis known as the liquidation basis. US auditing standards require auditors to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period, and under some circumstances assess the adequacy of disclosure about any going concern uncertainty. Under current US GAAP, however, there is no guidance on:

According to the FASB, this has led to varying interpretations of when and how going concern uncertainties should be disclosed. The proposed ASU is intended to improve the quality, consistency and timeliness of going concern footnote disclosure.

Under the proposed ASU, both SEC reporting companies and non-reporting entities would be required to evaluate going concern uncertainties at each annual and interim reporting period. An entity would be required to provide financial statement footnote disclosure when it is either:

The required disclosure would include, among other things, a description of the principal conditions and events giving rise to the potential inability of the entity to meet its obligations and management's plans to address the situation.

In addition to this, SEC reporting companies would be required to evaluate whether there is substantial doubt about their going concern presumption, taking into account management plans outside the ordinary course of business. If there is substantial doubt, the company would disclose this in its footnotes. This evaluation would not apply to non-reporting entities.

The FASB is accepting public comments on the proposed ASU through September 24, 2013.

For more information on the proposed ASU, see the FASB's news release. For a discussion of auditing standards relating to the going concern presumption, see Practice Note, Auditing: An Overview.