Project Pages

Going Concern Uncertainties and Severe Financial Stress

Project 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: Initial Deliberations

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 approved: April 2015
  • Consultative group established? Yes
  • Research results reported to the Board: October 2021
  • Added to the current technical agenda: December 2021
  • Task force established: October 2022
  • Deliberations began: July 2022
Current Developments: At the May and June 2023 meetings, the Board discussed the term used to describe the condition that governments will be required to identify and disclose—severe financial stress— as well as different alternatives to define that term.

Work Plan:
 
Board Meetings Topics to Be Considered
September 2023 Factors to identify severe financial stress; continuation of the discussion regarding definition of severe financial stress.
October/November
2023
Timing factors.
January 2024 Initial discussion for potential disclosures of governments with severe financial stress.
February–May 2024 User outreach about potential disclosures related to going concern uncertainty and severe financial stress.
July 2024 Discussion of disclosures related to going concern uncertainty and severe financial stress based on user outreach results.
September/October
2024
Cost-benefit considerations; review first draft of a Preliminary Views.
November 2024 Review preballot draft of a Preliminary Views.
December 2024

Review ballot draft of a Preliminary Views and consider for approval.
January–April 2025 Comment period (120-day period).
May and June 2025 Public hearings, User forums.
September 2025–February 2026 Redeliberations.
April 2026 Review first draft of a standards section of an Exposure Draft.
May 2026 Review preballot draft of an Exposure Draft.
June 2026 Review ballot draft of an Exposure Draft and consider for approval.
July–September 2026
Comment period (90-day period).
November 2026–
April 2027
Redeliberations based on stakeholder feedback.
May 2027 Review preballot draft of a final Statement.
June 2027 Review ballot draft of a final Statement and consider for approval.
 

Going Concern Uncertainties and Severe Financial Stress—Recent Minutes


Minutes of Meetings, June 27–29, 2023

The Board discussed whether the modifier for financial stress in this project should be substantial, as used in the context of substantial impact in the Risks and Uncertainties project. The Board tentatively decided that substantial should not be used as the modifier in this project.

The Board discussed the modifier that should be used to describe the degree of financial stress in this project and tentatively agreed that the modifier should be a degree greater than substantial.

The Board then discussed which modifier should be used to describe the degree of financial stress in this project and tentatively agreed that it should be severe.

Finally, the Board discussed whether severe should be defined as “a degree greater than substantial, including, but not limited to, catastrophic matters.” The Board tentatively agreed to that definition.

Minutes of Meetings, May 16–17, 2023

The Board began deliberations by first discussing whether the term financial stress should continue to be used as part of the description of the condition a government is experiencing. The Board tentatively decided that the term financial stress should continue to be used as part of the description of the condition a government is experiencing.

The Board then discussed whether the modifier severe is needed in the term to describe the condition a government is experiencing. The Board tentatively decided that a modifier is needed to describe the degree of financial stress a government is experiencing, but it did not decide which modifier should be used. (The use of the phrase severe financial stress in the following two paragraphs does not indicate that a modifier was chosen by the Board but simply used during the following discussions since the phrase was included in that manner in the papers prepared by the project staff for the meeting.)

The Board discussed four alternative approaches to defining severe financial stress. The Board tentatively decided not to take the alternative under which severe financial stress would be defined by developing a comprehensive model with specified ratios and indicators. The Board did not reach a tentative decision on the remaining three alternatives and decided to revisit the topic in conjunction with future discussions on the factors for identifying severe financial stress.

The Board then discussed whether severe financial stress should be defined as a point of a condition or as a range of conditions. The Board tentatively decided that severe financial stress is a range of conditions, defined as when the government either is in the circumstance described in the alternative that the Board will decide on or has had to take extraordinary measures to avoid being in that circumstance.

Minutes of Meetings, February 21–23, 2023

The Board continued deliberations by discussing potential going concern uncertainty disclosures that should be subject to user outreach to assess essentiality based on the definition of essentiality in Concepts Statement No. 7, Communication Methods in General Purpose External Financial Reports that Contain Basic Financial Statements: Notes to Financial Statements.

The Board discussed that the following potential disclosures from paragraph 19 of Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, should be included for user outreach: (1) relevant factors, including pertinent conditions and events, giving rise to the assessment of the government’s going concern uncertainty;
(2) government officials’ evaluation of the significance of those relevant factors, including conditions and events; (3) government officials’ actions in response to going concern uncertainty taken prior to the date the financial statements are available to be issued; and (4) information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.

The Board also discussed that the following potential disclosures from paragraph 205-40-50-14 of FASB Accounting Standards Codification® Subtopic 205-40, Presentation of Financial Statements—Going Concern, should be included for user outreach: (1) If relevant factors, including conditions and events, continue to raise going concern uncertainty in subsequent reporting periods, a government should continue to provide the required disclosures related to its going concern uncertainty in this Statement in those subsequent periods. Disclosures should become more extensive as additional information becomes available about the relevant factors, including conditions and events. The government should provide appropriate context and continuity in explaining how relevant factors, including conditions and events, have changed between reporting periods.

(2) For the period in which going concern uncertainty no longer exists, the government should disclose how the relevant factors, including conditions and events, that raised going concern uncertainty were resolved.

Additional potential disclosures from Statement 56 and paragraph 205-40-50-12 of FASB Codification were discussed but not selected for user outreach to assess essentiality.

Minutes of Meetings, November 16–18, 2022

The Board continued deliberations by discussing (1) the time element in the tentatively decided definition of going concern uncertainty (GCU), (2) the time element in the assessment of relevant factors, and (3) substantial doubt within the context of the tentatively decided definition of GCU.

The Board first discussed the time horizon, which is the assessment period for the tentatively decided definition of GCU. The Board discussed three alternatives as the starting point of the time horizon that GCU would cover. The Board tentatively decided that the date the financial statements are available to be issued is the most appropriate starting point for that time horizon. Additionally, the Board discussed three alternatives for the length of that time horizon and tentatively decided the most appropriate length should be 12 months.

The Board then discussed the time element in the assessment of relevant factors to identify GCU, which is the point in time at which relevant factors are known and reasonably knowable to the government. The Board considered three alternatives and tentatively decided the relevant factors would be known and reasonably knowable to the government at the date the financial statements are available to be issued.

Lastly, the Board addressed substantial doubt in the context of the tentatively decided definition of GCU. The Board tentatively decided that (1) substantial doubt should be clarified within the tentatively decided definition of GCU by incorporating a likelihood term and (2) substantial doubt should indicate a high degree of likelihood. Furthermore, the Board discussed four alternatives that could be used to indicate a high degree of likelihood. The Board tentatively decided probable should be used to clarify substantial doubt within the tentatively decided definition of GCU.

Minutes of Meetings, October 11–12, 2022

The Board continued deliberations by discussing the factors to identify going concern uncertainty (GCU).

The Board first discussed relevant factors that may lead to a potential government dissolution. The Board tentatively decided that relevant factors that may lead to a potential government dissolution include all factors that indicate a likelihood that a government may cease to exist as a legally separate entity, regardless of whether those factors are related to a government’s financial condition. The Board discussed examples of the relevant factors and tentatively decided that among the examples of relevant factors, there are two types of factors that should be separately identified from all other factors, if applicable: (1) a dissolution triggering event, which is the initiation of a dissolution legal proceeding by citizens, a higher authority such as a state or county, or the government itself in accordance with respective state laws, and (2) factors that may impact the outcome of a dissolution triggering event, including all those that may either increase or decrease the likelihood that a dissolution triggering event would ultimately result in a dissolution.

The Board then discussed two alternative approaches for how to use relevant factors to assess and identify GCU. The Board tentatively decided on an approach that would require a government to evaluate all relevant factors that indicate a likelihood of a potential government dissolution and determine whether all relevant factors, considered in the aggregate, indicate that a GCU exists.

Next, the Board discussed the relationship between a government filing for Chapter 9 bankruptcy and GCU. The Board tentatively decided that a government filing for Chapter 9 bankruptcy should not be considered a dissolution triggering event in the process of assessing and identifying GCU for disclosure purposes. The Board did, however, tentatively decide that a government filing for Chapter 9 bankruptcy should be considered an example that indicates financial difficulties and, therefore, a relevant factor to evaluate when assessing and identifying GCU.

The Board continued the discussion by tentatively deciding that (1) the term known and reasonably knowable should be used to describe the relevant factors for assessing and identifying GCU and (2) management’s mitigating plans should be considered relevant factors when assessing and identifying GCU. The Board concluded the discussion by tentatively deciding that there should not be special guidance provided for the dissolutions of school districts and special districts.

Minutes Archive

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

The Board tentatively decided the following:
  • All scenarios of severe financial stress (SFS), including SFS not to the point of going concern uncertainties (GCU) and SFS to the point of GCU, and all scenarios of and going concern uncertainty (GCU), including GCU not caused by SFS and GCU caused by SFS, should be in the scope of the project.
  • A two-step process should be used to develop guidance for GCU and SFS, with the first step focusing on guidance for GCU and the second step focusing on guidance for SFS.
  • Regarding guidance for GCU, GCU and related terms should be defined to address deficiencies in existing guidance, and both the indicators and disclosure requirements in the existing guidance should be reexamined for potential improvement.
  • Regarding guidance for SFS, the SFS guidance should be developed based on the enhanced and more comprehensive GCU guidance developed during the first step of the project.
  • There should be a clear distinction between the focus of GCU guidance and the focus of SFS guidance.
  • The proposed GCU guidance should be focused on uncertainty about a government’s existence, regardless of its financial condition.
  • The proposed SFS guidance should be focused on a government’s financial stress, regardless of whether there is uncertainty about its continued existence.
  • GCU guidance should be applied to all forms of government dissolutions.
  • Going concern is the assumption that a governmental entity will continue to exist as the same legally separate entity, regardless of its financial condition.
  • The definition and explanation of cease to be a going concern should be:
    • Cease to be a going concern is the situation in which a governmental entity ceases to exist as the same legally separate entity, whether through a merger, acquisition, or dissolution without replacement. In the context of a government ceasing to be a going concern:

           A merger is a form of government dissolution in which either:

      a. A government ceases to exist as the same legally separate entity and is combined with one or more governments to form one or more new governments.

      b. A government ceases to exist as the same legally separate entity and its operations are absorbed into, and provided by, one or more continuing governments.

           An acquisition is a form of government dissolution in which a government ceases to exist as the same legally separate entity and is acquired in exchange for significant consideration.

           A dissolution without replacement is a form of government dissolution in which a government ceases to exist as the same legally separate entity without being merged or acquired.

  • With the understanding that two additional components will be considered at future Board meetings, the definition of going concern uncertainty should be “substantial doubt about whether a governmental entity will continue to exist as the same legally separate entity, regardless of its financial condition.”
  • Relevant factors that may lead to a potential government dissolution should include all factors that indicate a likelihood that a government may cease to exist as a legally separate entity, regardless of whether those factors are related to a government’s financial condition.
  • The two types of factors that should be separately identified from all other relevant factors are (1) a dissolution triggering event, which is the initiation of a dissolution legal proceeding by citizens, a higher authority such as a state or county, or the government itself in accordance with respective state laws, and (2) factors that may impact the outcome of a dissolution triggering event, including all those that may either increase or decrease the likelihood that a dissolution triggering event would ultimately result in a dissolution.
  • To identify whether there is GCU for disclosure purposes, a government should evaluate all relevant factors that indicate a likelihood of a potential government dissolution and determine whether all relevant factors, considered in the aggregate, indicate that GCU exists.
  • A government filing for Chapter 9 bankruptcy should not be a dissolution-triggering event; instead, it should be considered an example that indicates financial difficulties and, therefore, a relevant factor to evaluate when assessing and identifying GCU.
  • The term known and reasonably knowable should be used to describe relevant factors for assessing and identifying GCU.
  • Management’s mitigating plans should be considered relevant factors for assessing and identifying GCU.
  • Special guidance should not be provided for the dissolutions of school districts and special districts.
  • The starting point of the time horizon that the definition of GCU should cover should be the date the financial statements are available to be issued.
  • The length of the time horizon that the definition of GCU should cover should be 12 months from the date the financial statements are available to be issued.
  • Relevant factors to identify GCU should be known and reasonably knowable to the government at the date the financial statements are available to be issued.
  • Substantial doubt should be clarified within the tentatively decided definition of GCU by incorporating a high degree of likelihood threshold, which is probable.
  • The term financial stress should continue to be used as part of the description of the condition a government is experiencing.
  • A modifier, such as severe, is needed to describe the degree of financial stress a government is experiencing, but no decision was reached on which modifier should be used.
  • The alternative under which financial stress would be defined by a comprehensive model with specified ratios and indicators will not be developed.
  • Financial stress is a range of conditions, defined as when the government either is in the circumstance or has had to take extraordinary measures to avoid being in that circumstance.
  • The modifier for financial stress in this project should not be substantial, as used in the context of substantial impact in the Risk and Uncertainties project.
  • The modifier used to describe the degree of financial stress in this project should be a degree greater than substantial, for example, severe.
  • The modifier used to describe the degree of the financial stress in this project should be severe.
  • The term severe should be defined as “a degree greater than substantial, including, but not limited to, catastrophic matters.
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