Project Pages

Going Concern Disclosures—Reexamination of Statement 56

Research Description: The objective of this research is to evaluate whether the existing GASB authoritative literature has provided preparers of financial statements for state and local governments sufficient guidance about management’s responsibilities for evaluating and disclosing uncertainties associated with severe financial stress (what is now referred to as “going concern” uncertainties). The research will provide the Board with the information it requires to consider the need for revisions to existing disclosure standards, which would be intended to reduce existing diversity in note disclosures and to more effectively meet financial statement user needs.

Added to Research Agenda: April 2015

Going Concern Disclosures—Project Plan

Background: GASB Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, incorporated into the GASB authoritative literature accounting and financial reporting guidance on three issues—related party transactions, subsequent events, and going concern considerations—presented in the American Institute of Certified Public Accountants’ (AICPA) Statements on Auditing Standards (SAS). The going concern guidance was found in U.S. Auditing Standards (AU) Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

The note disclosure requirements related to going concern were incorporated into the GASB’s literature basically “as is.” That guidance was issued by the AICPA in 1988.

The Board discussed issues associated with inconsistencies found in practice in the application of going concern guidance with the AICPA’s State and Local Government Expert Panel. Moreover, the Board discussed with the AICPA’s Audit Issues Task Force (AITF) whether there is a gap between what financial statement users discern from going concern disclosures (for example, a conclusion that the government will cease to exist as a legal entity) and the actual information needed by those users (that is, for the disclosures to identify severe financial stress). At the latter meeting, members of the AITF expressed interest in working with the GASB to address how to close this gap.

In June 2014, the GASB awarded a Gil Crain Memorial Research Grant to fund research on the experience with auditors issuing going concern opinions on state and local governments. The final report on that research was received in August 2015. In September 2015, the GASB awarded a Crain research grant to fund research on government dissolutions. The final report on that research was received in November 2016. Lastly, in June 2016, the GASB awarded a Crain research grant to fund a comprehensive statistical analysis of the predictive power of commonly used indicators of severe financial stress. The results of the Crain research will supplement the research activities being conducted by the GASB staff.

This pre-agenda research activity was ranked with the highest in priority among all pre-agenda research activities, monitoring activities, and potential topics by members of the GASAC in 2021.

Major Research Issues: The research would consider the relevance of the existing going concern standards to state and local governments. Specifically, the research is considering the following issues:

  • Are the current going concern indicators presented in note disclosure guidance appropriate for state and local governments, in light of the fact that, even under severe financial stress, few governments cease to operate even when encountering such indicators?
  • What other criteria might better achieve the objective of disclosing severe financial stress uncertainties with respect to governments?
  • What information do financial statement users need with respect to the disclosure of severe financial stress uncertainties?
  • Pre-agenda research approved: April 2015
  • Consultative group appointed? Yes
Current Developments: The staff completed extracting data from the financial statements of sample governments that have experienced events of financial stress. Using that data, the staff calculated various ratios in each of six categories: liquidity, financial position, performance, debt burden, liability burden, and demographic and economic trends. The staff has been analyzing the calculated ratios over multiple years for each sample government and looking for potential trends. The staff will be working on compiling a summary for the overall ratio analyses. External researchers continued a complementary statistical analysis funded with a Crain Grant. Lastly, drafting of the research memorandum began.
Research Work Plan: The plan for the pre-agenda research includes the following activities:

Board Meetings

Research Activities

September–October 2021: Finish drafting research memorandum.
October 11, 2021: Discuss research memorandum with the Board.