Going Concern–Different for Private Companies

The FASB issued an Exposure Draft (ED) on Going Concern Reporting last month.  At a high level, the ED will require preparers to evaluate and potentially report on their going concern status.  The evaluation is a multi-part process including different criteria for twelve months out and twenty-four months out; in addition, SEC filers might also determine if there is substantial doubt about their ability to continue as a going concern.  The big change here is that the preparer is required to evaluate and report on their going concern status where as today that is generally considered an auditor requirement.  I say generally considered because many SEC filers address much of the going concern evaluation criteria and disclosures in their current MD&A disclosures.

That leaves us two ways to look at this. One is that for SEC filers this is just a geography issue while for private companies this is truly new disclosure. The other is that for both types of filers, the FASB is continuing to advance that line of including forward looking information in the historical financial statements.  Of course MD&A disclosures of forward looking information get some protection under SEC safe harbor regulation while information in the financial statements receives no such protection.  In addition, because of the difference in the exact disclosure language, it is likely that most SEC filers will not be able to simply reference the financial statements, but instead will have to include the appropriate disclosures in both places once again expanding the size of the annual report.  Another consideration is that due to the safe harbor provisions, the preparer might be willing and able to discuss other going concern impacting issues that make the disclosures more transparent and complete than anything that would ever be included in the financial statements.

I began to wonder if this standard was really necessary at all, but that kept bringing me back to the fact that private companies do not have the same disclosure requirements as SEC filers and therefore are not including anything about going concern currently in their annual report.  With the Private Company Council working hard to eliminate or simplify accounting standards and disclosures for private companies I thought maybe this going concern disclosure issue is really something that goes the opposite direction.  Maybe this is a standard that is needed for private companies, but is not necessary for SEC filers.  That certainly would be an interesting development – truly different disclosures for private companies – rather than just a subset that subtracts from what is required of public companies.  Now that would be a truly interesting debate.

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