FASB Exposure Drafts Codify Auditing Literature

November 6, 2008

The Financial Accounting Standards Board (FASB) has issued exposure drafts (ED) that would codify going concern and subsequent guidance from the auditing literature into the accounting literature. FASB’s objective is that all generally accepted accounting principles (GAAP) are derived from a single source. FASB believes that this guidance should be in GAAP and directed to management of reporting entities.

Going Concern

Although it is assumed that entities will continue in existence, management may identify information about certain events that might indicate possible substantial doubt about the reporting entity’s ability to continue as a going concern.

Under the proposed standard, if there is substantial doubt about an entity’s ability to continue as a going concern, information must be disclosed about:

Pertinent conditions and events giving rise to the assessment of substantial doubt
The possible effects of those conditions and events
Management’s evaluation of the significance of those conditions and events, and any mitigating factors
Possible discontinuance of operations
Management’s plans to mitigate the effect of the uncertainties
Management’s plans to alleviate the substantial doubt about its ability to continue as a going concern
Information about the recoverability or classification of assets or liabilities

FASB made three modifications when incorporating the going concern guidance from the auditing standards:

Changed the time horizon to "all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period"
Used the phrase "all available information about the future" to describe the type of information that management should consider when making a going concern assessment, rather than the auditing literature’s requirement to consider "relevant conditions and events that exist at or have occurred prior to the completion of fieldwork"
Added a requirement to disclose when the organization does not present its financial statements on a going concern basis

Subsequent Events

Subsequent events occur after the date of the financial statements. These events fall into two categories, which the auditing literature refers to as type one events and type two events. The ED proposes that those events be renamed as follows:

Recognized subsequent events - events or transactions that provide additional evidence of conditions that existed at the date of the statement of financial position. Recognized subsequent events require adjustments to the financial statements.
Nonrecognized subsequent events - provide evidence about conditions that did not exist at the date of the statement of financial position but arose subsequent to that date. Nonrecognized subsequent events may need to be disclosed to keep the financial statements from being misleading.

FASB made two modifications when incorporating the subsequent events guidance from the auditing standards:

Added the notion of financial statements that are "available to be issued" - which means events occurring after the balance sheet date but before the date that financial statements are issued or are available to be issued. Financial statements are available to be issued when they are in complete form and format that complies with GAAP and all approvals necessary for issuance have been obtained.
Added a requirement to disclose the date through which subsequent events were considered and the basis for that date.

The comment deadline for both EDs is December 8, 2008. NACUBO encourages independent institutions with an interest in these standards to comment.

Staff resource: Sue Menditto, director, accounting policy.