GOING CONCERN COMMENT LETTER SUMMARY. 1. As of December 22, 2008, the Board received comment letters from 29 respondents as summarized below.

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1 GOING CONCERN COMMENT LETTER SUMMARY 1. As of December 22, 2008, the Board received comment letters from 29 respondents as summarized below. RESPONDENT PROFILE Respondent Type Number of Respondents Percentage Auditors 9 31% Others (Individuals, etc.) 9 31% Preparers 1 3% AICPA and Affiliates 2 7% CPA Societies 7 24% Academics 1 3% Total % SIGNIFICANT ISSUES 2. A large majority of the respondents generally supported the Board s decision to include guidance on the going concern assessment in accounting literature. Notwithstanding the aforementioned support of the Board s objective, respondents provided numerous comments on the requirements of the proposed Statement. 3. Significant issues raised by respondents addressed: a. The type of information and the time horizon for making the going concern assessment b. The disclosures required by the proposed Statement c. The definition of a going concern d. The effective date of the final Statement e. Auditing literature. 1

2 Type of Information 4. AU Section 341 requires that knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor s report (paragraph.02) be considered when performing the going concern assessment. The proposed Statement would require management s assessment of the going concern assumption to consider all available information about the future. The basis for conclusions states that the Board thinks there is no substantial difference between [the proposed wording] and the wording previously included in AU Section 341. Therefore, the Board does not expect this decision to result in a change to practice. 5. Although there was some support for the Board s decision, a number of respondents disagreed with the change in wording, with at least one respondent noting that the proposed change would represent a significant departure from practice (CL #21). Respondents provided various reasons as to why they think the proposed change in wording is inappropriate. Those reasons are as follows: a. The proposed wording is too broad b. The proposed wording raises concerns about how much time and effort should be spent in making the going concern assessment c. The proposed wording may not be applied consistently. Wording too Broad 6. A few respondents observed that the wording all available information about the future is too broad. Respondents commented that the wording could imply that management would have to consider an unlimited amount of information, regardless of its quality or relevance. The wording could also imply that management would have to consider future conditions and events that may be distant and whose outcome may be unreliable, rather than considering knowledge of relevant conditions or events that exist at or have occurred. An assessment of all available information would be unrealistic and impracticable (CL #21; emphasis in original). At least one respondent suggested that the Board add qualifying language, such as take into account all available information about the reasonably foreseeable future 2

3 (CL #5; emphasis added). At least one respondent also suggested retaining the current wording of the type of information considered in the going concern assessment. Time and Effort 7. A few respondents observed that the new wording raises questions about how much time, cost, and effort management should put forth in considering all available information about the future. Respondents asked that the Board provide guidance with one suggesting that language similar to that contained in paragraph 30 of FASB Statement No. 157, Fair Value Measurements, be included. One respondent suggested that the costs associated with considering all available information outweigh any benefits to users (CL #21). Inconsistent Application 8. A few respondents observed that the new wording may lead to inconsistent application in practice. One respondent noted that the nature, volume, and type of information available vary by company. Time Horizon 9. The Exposure Draft proposes to change the time horizon used in management s going concern assessment from one year to a time horizon that is at least, but is not limited to, 12 months from the end of the reporting period. The Board noted in the basis for conclusions that the new time horizon avoids the inherent problems that a bright-line time horizon would create for events or conditions occurring just beyond the one-year time horizon that are significant and most likely would have to be disclosed. The new horizon also would result in a convergent approach between U.S. GAAP and international financial reporting standards (IFRSs). 10. Although several respondents supported the change for reasons similar to those provided by the Board, the majority of respondents disagreed with the change. Respondents provided various reasons for why they think the proposed time horizon is inappropriate. Those reasons are as follows: 3

4 a. The proposed time horizon does not capture the real purpose of the going concern assessment b. The proposed time horizon would create a seemingly indefinite time horizon c. The proposed time horizon would be difficult to apply for both management and their auditors/accountants d. The proposed time horizon would have legal ramifications for both management and their auditors/accountants e. The proposed time horizon conflicts with other accounting and auditing literature f. There are better ways to address the Board s concern about events or conditions occurring just beyond the one-year time horizon that are significant and most likely would have to be disclosed. Purpose of the Going Concern Assessment 11. A few respondents observed that the purpose of the going concern assessment is to address the viability of an entity over the next 12 months, not to assess the viability of a business model in general. Furthermore, the current going concern assessment is not meant to preclude an entity from considering further into the future; rather, it merely provides a minimum parameter of required proof to conclude that a going concern basis is appropriate (CL #4). Respondents asserted that the current going concern assessment is important to users, is currently understood by all, and promotes clarity and comparability in analysis and conclusions (CL #18). Indefinite Time Horizon 12. A few respondents commented that the new time horizon could imply that the going concern assessment covers an indefinite time period. This interpretation could lead to the development of inconsistency in practice (for example, entities may choose to use different time periods 18 months, 36 months, etc. when making their assessment). At least one respondent observed that there is insufficient guidance in the proposed 4

5 Statement to determine what the appropriate time period to use would be. One respondent commented that an open-ended time horizon [could] cause undue complexity for management and confusion for users (CL #21). The new time horizon also could be interpreted as holding preparers and auditors responsible for unreasonably long future time periods (CL #13). Another respondent suggested that an open-ended time horizon could result in going concern opinions for any company that relies on active global economies and financial markets (CL #3). Respondents provided suggestions on how the Board could avoid implying a time horizon for the going concern assessment that appears to cover an indefinite time period. Applying the New Time Horizon 13. A majority of respondents indicated that the new time horizon would be difficult to apply in practice for both management and auditors. Respondents observed that the new time horizon: (a) would require the use of significant judgment, (b) seemingly overlooks the difficulty in predicting the outcome of, or even identifying, future events, conditions, and management s ability to address uncertainties that raise substantial doubt about an entity s ability to continue as a going concern, (c) will be difficult to apply by management performing the going concern assessment for the first time (for example, management of entities that do not require an audit), (d) may increase the visibility of disputes between management and their auditors about an entity s ability to continue as a going concern, (e) may lead management to focus too much on future prospects, rather than assessing an entity s short-term viability, (f) diminishes the usefulness of the going concern assessment because the reliability of the information used decreases as management looks further into the future, (g) may lead to increased costs, h) raises several concerns on how management would address borrowing issues to satisfy its auditors that it can continue as a going concern, (i) will naturally skew [the going concern assessment] towards a conclusion that there is a doubt about an entity s ability to continue (CL #18) and (j) raises questions and difficulties for those auditing the going concern assessment. 5

6 Legal Ramifications of New Time Horizon 14. A number of respondents observed that the lengthened time horizon has legal ramifications for both management and auditors. Respondents commented that the new time horizon is unworkable in the U.S. legal environment. Respondents also observed that the open-ended time horizon may lead to more second guessing by users as well as unhelpful language in disclosures that might obfuscate other information (CL #18). Furthermore, respondents noted that the lack of a going concern disclosure in a financial report may lead users to think that management is asserting that the entity will continue to exist indefinitely. Respondents also observed that the 12-month time horizon served as a safe harbor for management and auditors and served as an acknowledgement of a lack of a crystal ball (CL #4). 15. One respondent commented that it appears that entities preparing their financial statements using IFRSs have interpreted the time horizon to mean no more than approximately 12 months after the balance sheet date (CL #27; emphasis in original). This respondent expressed doubt that such an interpretation would be adopted in the U.S. legal environment. New Time Horizon Conflicts with Other Auditing and Accounting Literature 16. Several respondents commented that the new time horizon conflicts with existing auditing and accounting literature that uses a one-year time horizon. Respondents observed that the new time horizon conflicts with AICPA Statement of Position (SOP) 94-6, Disclosure of Certain Significant Risks and Uncertainties, FASB Statement No. 6, Classification of Short-Term Obligations Expected to Be Refinanced, and AU Section 341, The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern, of the AICPA Codification of Statements on Auditing Standards, which use a one-year bright line. One respondent observed that a differing time horizon in accounting and auditing literature for the going concern assessment would not improve financial reporting because it may lead auditors and management to different conclusions on whether the use of the going concern basis is appropriate, which does not benefit users. This same respondent 6

7 suggested that the Board wait until it and auditing standard-setters could consider the matter jointly (CL #17). Alternative Ways to Address Board Concern 17. Some respondents offered alternative ways for the Board to address its concern about events or conditions occurring just beyond the one-year time horizon that are significant and most likely would have to be disclosed. Those suggestions include: (a) expanded disclosure requirements, for example, amending SOP 94-6 and (b) doing nothing because current SEC disclosure requirements and contingent-liability and fair-value accounting already address the Board s concern. 18. Other respondents suggested alternative time horizons that could be used, including (a) a 12-month period that would require consideration of information about significant events or conditions occurring just beyond the 12-month period; (b) a range of 12 to 18 months; (c) one year from the date of the auditor s report; (d) one year from the date financial statements are issued; and (e) a five-year time horizon. Disclosure Requirements 19. The proposed Statement combines disclosure requirements contained in AU Section 341 with certain disclosure requirements in IAS 1, Presentation of Financial Statements. Although there was general support for the proposed disclosures, several respondents had specific comments on the disclosure requirements. Specifically, respondents commented on the following: a. The apparent exclusion of the recommended disclosure contained in AU Section 341, paragraph.11 b. The need for clarification on the application of the proposed disclosure requirements c. Suggestions for additional disclosure requirements. AU Section 341, Paragraph A large number of respondents observed that the optional disclosures suggested in AU Section 341, paragraph.11 were not included in the Exposure Draft. This raised 7

8 several questions from constituents as to whether the Board intends for management to provide the disclosures required by paragraph seven of the proposed Statement even when substantial doubt has been alleviated. Several respondents suggested that the disclosures in paragraph seven be required even when substantial doubt is alleviated, as it is now. One respondent, on the other hand, suggested that paragraph seven be modified to require disclosure only when there is substantial doubt. Clarification Needed 21. Several respondents either suggested ways to clarify the disclosure requirements or requested that the Board provide clarification. For example, one respondent asked the Board to clarify what type of information should be disclosed to comply with paragraph 7(f), observing that the current disclosure requirement was too vague. Another respondent observed that, in general, the disclosure requirements in the proposed Statement were vague when compared to AU Section 341. Another respondent noted that the threshold for disclosing material uncertainties is unclear (see CL #21). Additional Disclosure Requirement 22. One respondent requested that the Board require explicit disclosure as to whether management has concluded that there is substantial doubt about an entity s ability to continue as a going concern, rather than only requiring disclosure of (a) the events and conditions that give rise to substantial doubt and (b) management s plans to address those events and conditions. Another respondent suggested that the Board require disclosure of the factors considered by management in determining there is not substantial doubt about the entity s ability to continue as a going concern. [Such a disclosure will] be helpful to users of financial statements, particularly when the [going concern] assessment was not clear-cut (CL #29). Definition of Going Concern 23. The proposed Statement does not provide a definition for going concern. Respondents commented on the following: a. Suggestions for the definition of a going concern. 8

9 24. A few of respondents suggested that the Board include a definition of going concern. A respondent noted that lack of a definition will place difficult burden on preparers and their auditors as they grapple with an unknown target. In addition, a respondent recommended using the language in AU Section 341 to define a going concern. Though AU Section 341 does not define a going concern, the section does explain what is not a going concern. AU Section 341 paragraph.01 states, Ordinarily, information that significantly contradicts the going concern assumption relates to the entity s inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions. Effective Date 25. The Exposure Draft proposes an effective date for interim or annual financial statements issued after ratification of the FASB Accounting Standards Codification. Respondents had several comments on the proposed effective date, including requests for both an earlier and a later effective date. The one respondent who requested an earlier effective date (that the proposed Statement be effective for financial statements issued after December 31, 2008) observed that the proposed Statement can positively contribute towards the stabilization of the currently volatile US capital market (CL #12). 26. Other respondents suggested that the effective date be delayed because, assuming that the Codification is ratified on July 1, 2009, the transition period will be insufficient to address all implementation issues. Other stated problems with the effective date include: (a) causing a change in going concern guidance either during the time many companies are being audited or are issuing financial statements; (b) risking the possibility that constituents may miss the effective date if it is connected to the ratification of the Codification; and (c) raising operationally issues as a result of the potential conflict between auditing and accounting guidance. 27. One respondent suggested that the effective date coincide with the effective date of any auditing standard that would amend the current auditing guidance to make it consistent with the accounting literature. Others simply suggested setting a firm 9

10 effective date for the proposed Statement, rather than connecting it to the Codification, so that there would be sufficient time to prepare to apply the guidance. Auditing Literature 28. Several respondents, throughout and including the comments presented above, have expressed that there needs to be consistency with the auditing literature issued by the PCAOB and the AICPA with the final accounting standard. The staff is working with representatives from the PCAOB and the AICPA to ensure that there is proper communication of the final accounting standard in a timely manner to ensure consistency of accounting and auditing literature. OTHER ISSUES 29. Respondents also commented on the following issues: a. Liquidation basis of accounting There were mixed views as to whether the Board should address the liquidation basis of accounting. One respondent noted that there is diversity in practice on how to prepare financial statements under the liquidation basis of accounting and suggested that the Board pursue a separate project on the topic. One respondent observed that the Board should eventually address what the appropriate basis of accounting is when a going concern basis is not appropriate. Another respondent suggested that the Board state that it was not its intent to change practice on when an entity adopts the liquidation basis of accounting. b. Other implementation issues Respondents raised various implementation issues about the going concern guidance. For example, one respondent suggested that there was an inherent conflict among the proposed Statement and guidance in Statement 157, FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and legal precedence with respect to the fair value measurement of liabilities. Other respondents questioned whether the Board s concern about significant issues occurring after the 12-month time horizon was legitimate. A couple of respondents asked whether the going concern basis would be appropriate in certain scenarios. Finally, one respondent asked whether management s intent to liquidate the entity or cease operations is limited to a period of time (CL #24). c. Editorial comments Respondents provided various editorial comments on different aspects of the proposed Statement. 10

11 30. Additional issues raised by respondents include the application of the Statement to interim periods, the use of prospective information by management in its going concern assessment, general sentiments about convergence with IFRSs, comments on the going concern assessment and current market conditions, whether sufficient preparer input was received on the Exposure Draft, a request to consider why the 12- month time horizon was first established, requests for additional implementation guidance, and crosscutting issues with relevant auditing standards (for example, including more guidance from AU Section 341 in the final Statement). 11