Project Pages

Going Concern Uncertainties and Severe Financial Stress

Poject Description: The objective of this project is to address issues related to disclosures regarding going concern uncertainties and severe financial stress. The project will consider (1) improvements to existing guidance for going concern considerations to address diversity in practice and clarify the circumstances under which disclosure is appropriate, (2) developing a definition of severe financial stress and criteria for identifying when governments should disclose their exposure to severe financial stress, and (3) what information about a government’s exposure to severe financial stress is necessary to disclose.

Status: Added to Agenda

Going Concern Uncertainties and Severe Financial Stress—Project Plan

Background: The concept of going concern uncertainties was not specifically developed for state and local governments and was not significantly modified for the government environment when incorporated into the GASB literature. The GASB’s pre-agenda research indicated that, although current guidance provides that financial statement preparers have a responsibility to evaluate a government’s ability to continue as a going concern, such evaluations often pose challenges to preparers and auditors and has resulted in diversity in practice when applying that guidance. For example, a study funded by the GASB’s Gilbert W. Crain Memorial Research Grant program (Crain Grant) noted that in several cases, a government received more than one going concern opinion (GCO) during the period reviewed (1996–2013). Among those governments that received a GCO, most but not all disclosed in notes to financial statements or management’s discussion and analysis (MD&A) the reasons for receiving a GCO in the year they received the GCO; a smaller majority also mentioned those issues in the financial report for the year prior to receiving the GCO.

The pre-agenda research also indicated that, even when governments are in or have been experiencing severe financial stress, few dissolve or cease operations. Some state laws prohibit governments from filing for bankruptcy and some states do not allow dissolution of governments without a merger or consolidation arrangement with another government to avoid interruption of services provided for affected citizens. Even when a government seeks Chapter 9 bankruptcy protection, it generally continues to exist as the same legal entity.

The pre-agenda research indicates that users need information well in advance of the point at which dissolution is a practical consideration. However, existing GASB standards do not contain guidance for an earlier disclosure that would be more beneficial to users, such as a process by which a government evaluates its exposure to severe financial stress and, under certain circumstances, discloses information about that exposure. Governments facing severe financial stress is a significant concern of governments themselves, as evidenced by the many states that take a proactive approach to monitoring their local governments’ financial health and addressing those experiencing severe financial stress.

The findings of studies funded with Crain Grants indicate that relatively few governments cease to continue as a going concern in the sense of dissolving without arrangements to ensure that the needs of affected citizens continue to be met. This suggests that the population of governments with going concern uncertainties is small. Consequently, the number of governments likely to be affected by potential amendments to current going concern disclosure guidance may continue to be small.

In contrast, there is evidence that the population of governments experiencing severe financial stress is noticeably larger than the population of governments with going concern uncertainties. It was not the goal of the pre-agenda research to count the number of governments experiencing severe financial stress in any given year. However, the research results suggest that the population size of governments in severe financial stress is larger than that of governments with going concern uncertainties but still represents a small subset of governments.

Nearly half (47 percent) of respondents to a GASB survey of users have evaluated government financial statements that contained a going concern note disclosure. Those respondents generally found the disclosures to be valuable and indicated that the information in the note was used to assess a government’s financial condition, operating results, and ability to meeting its ongoing commitments; make municipal bonds investment decisions and credit rating assessments; and develop legislative or oversight responses. Those respondents also noted that the information disclosed helped them understand the reasons for the going concern uncertainty and the likelihood that management’s plans to remediate the concerns were realistic.

The survey asked users what information should be disclosed in the notes if a government is in severe financial stress. All four types of information listed in the answer received substantial support (multiple choices were allowed):
  • Management’s plan to remediate the severe financial stress (89 percent).
  • Explanation of how the severe financial stress was identified (81 percent)
  • Environmental factors leading to the severe financial stress determination (75 percent)
  • Specific financial ratios that indicate severe financial stress (72 percent)
Accounting and Financial Reporting Issues: The project is considering the following issues:
  • How should the existing guidance on going concern uncertainties be clarified or improved to reduce diversity in practice in applying the guidance?
  • How should severe financial stress be defined? How should that definition differ from going concern uncertainties?
  • What are the common indicators that a government is exposed to severe financial stress? How might those indicators and other information be used to evaluate exposure to severe financial stress?
  • If a government is determined to be exposed to severe financial stress, what relevant information should a government disclose in notes to financial statements?
Project History:
  • Pre-agenda research proposed: April 2015
  • Consultative group established? Yes
  • Research results reported to the Board: October 2021
  • Added to the current technical agenda: December 2021
Current Developments:

Work Plan:
Board Meetings Topics to Be Considered
July 2022 Scope of the project
August 2022 Definitions of going concern uncertainties and severe financial distress
October 2022 Considerations for governments of different type
November 2022–January 2023 Information and conditions relevant to assessments of going concern uncertainties and severe financial stress
February 2023 Level of reporting units to apply to assessments
April 2023 Time horizon for assessing going concern uncertainties and severe financial stress; other considerations for guidance on assessment
May 2023 Disclosure for governments with going concern uncertainties or exposure to severe financial stress
June 2023 Consideration of essentiality for information related to disclosures of going concern uncertainties and exposure to severe financial stress
August 2023 Effective date and transition; review first draft of a Preliminary Views; cost-benefit considerations
October/November 2023 Review preballot draft of a Preliminary Views
December 2023 Review ballot draft of a Preliminary Views and consider for approval
December–May 2024 Comment period (120-day period); public hearings and user forums
Field test
June 17, 2024–February 9, 2025 Redeliberations
April/May 2025 Review first draft of a standards section of an Exposure Draft
June 2025 Review preballot draft of an Exposure Draft
July 2025 Review ballot draft of an Exposure Draft and consider for approval
August–October 2025 Commend period (90-day period)
December 2025–April 2026 Redeliberations
May 2026 Review preballot draft of a final Statement
June 15, 2026 Review ballot draft of a final Statement and consider for approval

Going Concern Uncertainties and Severe Financial Stress—Recent Minutes


Going Concern Uncertainties and Severe Financial Stress—Tentative Board Decisions to Date