Proposed FASB update to “going concern” presumption
By Brett Theisen, Gibbons P.C
GAAP-compliant financial statements are prepared under a presumption that the reporting entity will continue as a going concern, i.e., assets will be realised and obligations met in the ordinary course of business. The presumption lasts until an entity’s liquidation is imminent; thereafter, liquidation accounting must be used.
FASB’s recently proposed rule amending ASC § 205-40, et seq. (applicable to public and private entities) provides new guidance to management of its responsibilities when a business enters the “zone of insolvency”. Going concern uncertainties would be evaluated at each reporting period, with footnote disclosures required if it is:
1) more likely than not that the entity will be unable to meet its obligations within 12 months without taking action outside the ordinary course of business, or
2) known or probable that the entity will be unable to meet its obligations within 24 months absent of such extraordinary action.
The new rule could provide useful information regarding management’s often murky and shifting fiduciary duties when a business approaches insolvency. Generally, shareholders can sue to enforce fiduciary duties while an entity is solvent.
However, upon actual insolvency that right to sue extends to creditors. Management must always undertake to act in the best interest of all parties. Of course, there is a risk that added disclosures accelerate an entity’s collapse and prematurely doom a troubled, but still viable, company.
Brett S. Theisen, Associate
Gibbons P.C, Newark, New Jersey, USA
T: +1 973 596 4923
With 230 attorneys and five offices in four states, Gibbons P.C. is ranked among the nation’s top 200 law firms by The American Lawyer. The firm provides comprehensive litigation and transactional services to clients ranging from dynamic start-ups to the Fortune 100.
Brett S. Theisen is an associate with Gibbons P.C. in its Financial Restructuring & Creditors’ Rights Department in its Newark, NJ headquarters. He focuses on issues arising under the U.S. Bankruptcy Code and applicable state and federal law. He currently represents the Trustee for the DBSI Estate Litigation Trust and DBSI Private Actions Trust.
published: October 2014