Snowed In in Punxsutawney: FASB and Going Concern

[Scene: A '70s-era, flapping-number alarm clock on a doily-covered nightstand goes off at 6 a.m. Bill Murray lies asleep under a quilt. Cue Sonny and Cher.]

Then put your little hand in mine/There ain't no hill or mountain we can't climb … Babe, I got you babe…

[DJ's voice on radio] "Okay, campers! Rise and shine! And don't forget your booties, 'cause it's COLD out there today!"

  •  Groundhog Day (Columbia Pictures, 1993)

Unfortunately, for the hard-working campers in Norwalk, Conn., FASB's long-running project on the reporting of going concern has had its "Groundhog Day" moments. This is a project that the Financial Accounting Standards Board started in 2008, at about the same time that big banks, giant insurer AIG and the Big Three US automakers were reeling in the crisis, and just before TARP became a household word.

An unfortunate repetition of events seems to be a feature of FASB's effort aimed at improving reporting - including footnote disclosures - surrounding the presumption that reporting entities will still be around as going concerns. That presumption is a linchpin notion in accounting.

For the so-called "early-warning disclosures" that were part of the board's proposal for improved reporting on going concern, FASB's March 26 meeting marked the end for those particular footnote reporting plans.

FASB Rides the See-Saw.

After the ups-and-downs of this see-saw of a standard-setting project, FASB is on a course to essentially import into GAAP what is now in auditing standards. More ambitious improvements have been dropped.

A look back at the log of BBNA's reporting on the going concern effort contains terms such as "tortuous path" and "twists and turns." (See 08 APPR 412, 5/11/12). Things were proposed, then withdrawn (particularly when it looked like similar info would be called for in disclosures about liquidity and interest rate risk, a spin-off effort from FASB about a huge undertaking on financial instruments,), then proposed again … then ultimately nixed.

To further complicate things, FASB - facing difficult rulemaking challenges and meeting stiff resistance from some constituents -- in the end placed the liquidity and interest rate risk disclosures project on a very cold back burner. It remains there. Board members Thomas Linsmeier and Marc Siegel have lamented the effective tabling of a liquidity disclosures effort.

The early-warning disclosures made it into FASB's June 2013 draft standard on going concern, but were dropped at the board's March 26 meeting. The formal wording of a staff summary of FASB's tentative decisions belies the nature of some fairly testy exchanges among board members that day. 

"The exposure draft proposed that entities would begin disclosures of going concern uncertainties when certain early-warning disclosure criteria were met," according to the summary. "In addition to early-warning disclosures, SEC filers would assess whether there is substantial doubt about the entity's ability to continue as a going concern for a period of 24 months after the balance sheet date.

"In light of the feedback received on the exposure draft, the board decided not to require the proposed early-warning disclosures," the staff continued in its summing up of the March 26 discussions. "Instead, the Board decided to pursue an approach that would require disclosures when there is substantial doubt similar to disclosures provided today under existing auditing standards."

Lawrence Smith, perhaps the most vocal of FASB's advocates for more revelatory reporting on going concern, sounded themes March 26 with words that were fairly similar to what he used back on April 11, 2012. In both meetings, he recalled advice to FASB favoring going concern-type disclosures that came from members of advisory councils focused on smaller business and private companies - non-filers who do not have to carry out risks-related disclosures in non-audited MD&A.

At FASB's March 26 meeting, James Kroeker, the board's vice chairman and a former chief accountant at the Securities and Exchange Commission, said that, as the proposed reporting "relates to early-warning aspects, certainly for public companies there are voluminous requirements already about risks." He was referring to management's discussion and analysis, SEC filers' non-audited MD&A disclosures.

Kroeker Seeks to Avoid Sowing Confusion, Overdisclosure.

Kroeker suggested that added early-warning disclosures would sow confusion. (The debate between him and other board members did not make for the more contentious exchanges.)

Linsmeier and Smith were critical of the overall MD&A picture in the risks-revealing department. Linsmeier said that he does not believe the disclosures in SEC filings are sufficient.

Smith Seeks to "Focus People on the Correct Risks."

Smith seemed to make a can't-see-the-forest-for the trees-kind of argument about MD&A's effectiveness. He disagreed with Kroeker's point about the audited disclosures creating confusion.

"I thought that our requirement that you only need to make these disclosures once you reach a more-likely-than-not threshold would focus people on the correct risks, or the correct circumstances facing the company to cause it to need to consider other courses of action outside the ordinary course of business," he said March 26.  Smith argued that the disclosures "would create greater and better focus.

"Because right now," he added. "I mean, I think when you pick up MD&A, when you read all the stuff on risk, you kind of scratch your head and say, 'why would I ever invest in this company, considering all these risks?' Because, I don't think, it's put in the appropriate context", he said, "how realistic those risks are, or what degree those risks are really facing the company."

For his part, in the debate with Smith, Kroeker suggested that, with the added disclosures proposed earlier in the going concern project, there would be a tendency "to overdisclose those risks."

Another board member, Harold Schroeder proposed better targeting of the caution-light disclosures. He said he was looking for disclosures - reduced from MD&A's -- about more imminent risks that would fall in a 30 to 50 percent probability range, rather than a 0 to 30 percent range that he indicated is reflected in voluminous MD&A today. That would send a message of "here are the ones that we are concerned about today," Schroeder suggested.

Smith and Siegel proposed that a more general project on companies' reporting about risks and uncertainties - a topic on which FASB's standard-setting "fell way short" in past years, Smith said -- perhaps should be considered for the board's next agenda.

Almost certainly, that would give rise to the citing of previously defined views and some time-worn, perennial themes in accounting - in other words, some reliving of events, in the same way that the cynical Pittsburgh TV weather forecaster played by Bill Murray faced life, day-by-identical-day, in "Groundhog Day."

Such is the lot of standard-setters in it for the long haul. Tough sledding in Punxsutawney.  

  • Steve Burkholder

Bloomberg BNA Staff Correspondent