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Concerns Linger About FASB's Going Concern Standard

by Edith Orenstein

CEOs, CFOs, investor relations professionals and corporate board members should be concerned about the implications of FASB's latest standard, ASU 2014-15 on Going Concern.

The standard  formally shifts the responsibility for making the 'call' about whether the company is at risk of losing its status as a 'going concern'  from external auditors to company management, and imposes a one-year time horizon from the date a financial statement issued for that determination.

Concerns remain whether the standard could have a significant circular effect in destabilizing investor opinion due to a 'going concern' opinion based on the principles in the standard and related required forward-looking disclosures.

The history of FASB's final Going Concern Standard, ASU 2014-15, (full title: Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern) reads something like a 'hot potato' novella as the project bounced back and forth over the last five years in discussions between, primarily, the PCAOB and AICPA (which initially reviewed the going concern standards applicable to auditors) and the FASB.

At issue was whether the going concern standard and related responsibility for making the 'call' most appropriately should be the professional decision made by, management (i.e. as part of GAAP), or by the auditor (i.e. as part of GAAS or the PCAOB's auditing standards).

For a quick study of the new standard, see: FASB-in-Focus: Going Concern, and a detailed review of the standard by legal firm Morgan Lewis.

The SEC, as ultimate overseer of both FASB and the PCAOB, took part in tri-partite discussions on this project as well. Ultimately, the ball landed in FASB's court, with the FASB board voting on and publishing its Going Concern standard last week.

Dissenting Opinions Enlightening

But not all seven FASB board members voted in favor of issuing the final standard, and the dissenting opinions highlighted lingering concerns about going concerns.

In my personal opinion, some of the dissenting views of FASB board members Tom Linsmeier and Larry Smith, as documented from page 15 to page 18 in the FASB's final Going Concern standard, may help preparers, auditors, or possibly even standard-setters (FASB) or regulators (SEC or PCAOB) in implementing the standard, or considering the need for further implementation guidance or regulatory action, such as a Safe Harbor to protect preparers from potential liability on required forward-looking disclosures.

Additionally, I believe some of the dissenting views, as well as the assenting views of the FASB's final Going Concern standard, may be worth taking into consideration as the SEC moves forward on its Disclosure Effectiveness Initiative, and FASB and the IASB move forward on their own Disclosure improvements projects.

To be clear, I am not criticizing FASB's standard, - although I am raising a question about safe harbor. I am also concerned there could potentially be an uptick in going concern opinions that may not necessarily reflect a change in the underlying economic health of companies, or whether those companies "should have" been deemed to have 'going concern' uncertainties under previous auditor-driving standards.

Rather, a potential uptick could occur simply due to:

  • the change in wording of the new standard
  • how it is applied by certain companies or auditors
  • via 'industry practice,
  • via informal guidance that may or may not rise to the level of formal standards that is issued by industry groups
  • via 'speech GAAP' (which was said to not exist anymore, but I believe still exists if there is a vacuum),
  • or in practice, how the PCAOB inspects audit firms' procedures (e.g. evidence obtained) in relation to the new FASB standard.
Even if there is not an uptick in the "going concern" opinions per se, the new disclosures (including uncertainties and mitigating factors) could cause a loss in investor confidence that significantly understates the economic health of the company, and there may be a shift in focus of investors to the one-year horizon.

The question of cost-benefit, among others, was also raised in the dissenting opinions.

Therefore, I believe investor education by FASB,  potentially in concert with the SEC as the investor's advocate, and the PCAOB, could be extremely key to avoid a self-fulfilling prophecy that could, worst-case, drive an uncalled-for downturn in the capital markets.