FASB Going Concern Disclosure Too Little, Too Late, Moody’s Says

July 1, 2013

In an article it “Credit Outlook,” report, Moody’s Investors Service said accounting disclosures being proposed by the U.S. Financial Accounting Standards Board to provide investors with an early warning of a company’s trouble will instead come too late to provide meaningful benefits.

The commentary refers to FASB’s issuance last Wednesday of an exposure draft of proposed guidance on the disclosure of going concern uncertainties. The proposed guidance would apply to all reporting organizations, including public companies, private companies, and nonpublic not-for-profit organizations.

Moody’s notes that the proposal requires an entity’s management to assess the likelihood that it will be unable to meet its obligations and to determine whether there is substantial doubt about its ability to continue as a going concern. Once a certain level of uncertainty is met, management will be required to disclose the circumstances creating the uncertainty, potential effects on the entity and its plans to address the potential inability to meet obligations.

Currently, FASB does not require management to assess or disclose an entity’s ability to continue as a going concern, although such analysis is required of an entity’s auditor.

Moody’s believes that the high threshold of uncertainty that FASB has set before requiring disclosure will result in very few disclosures. Referring to similar going-concern disclosure requirements by the International Financial Reporting Standards, Moody’s said that disclosures were rare during the 2008-09 global financial crisis.

“An entity that reaches or passes the disclosure threshold would likely already have a low rating, and therefore the new disclosure will not provide significant new information to help with credit analysis. Instead, it will only confirm factors and circumstances that a well-informed investor would have already known and considered,” the Moody’s article says.

Moody’s notes that credit analysis, focused on an entity’s ability to repay debt, must identify uncertainties much sooner than the analysis behind a going concern uncertainty disclosure.

Source: Moody’s Investors Service