Beyond publishing some enlightening data to demonstrate liquidity and interest-rate risks, management will not be required to make any judgment-based disclosures about whether an entity can remain in business, based on the latest thinking of the Financial Accounting Standards Board.
FASB decided during a recent meeting it doesn't have the authority to require the kind of forward-looking disclosures that investors are demanding, some of which likely would rely on information that falls outside of Generally Accepted Accounting Principles. Instead, FASB will move forward with the quantitative disclosures it has already agreed to require that will give investors some earlier signals about where a company may be buckling under liquidity or interest rate risks, and perhaps share some ideas for further improvements in disclosure requirements with the Securities and Exchange Commission.
Board members Tom Linsmeier and Larry Smith were especially disheartened by the board's decision, which Linsmeier characterized as “standing down.” FASB and the Public Company Accounting Oversight Board have both volleyed questions about how to get more information to investors when management is worried about a company's ability to stay in business. “We've been on a journey with a recognition that investors, both private and public, have insufficient information to make quality decisions about going concern problems,” Linsmeier said. “Now the staff is recommending we do nothing. I just don't understand that.”
FASB Chairman Leslie Seidman challenged Linsmeier's view that the board is standing down. “We have already agreed to include and require some very robust new disclosures about liquidity risk for all entities, public and private, and interest rate risk for financial institutions, that to me are very responsive to the feedback we have gotten from investors that there is a gap in GAAP about these items,” she said. “It lays an excellent foundation for entities to have to talk about changes in that information.” When coupled with existing disclosure requirements in management discussion and analysis, the new tables should give investors, auditors, and regulators the information they need to ask management the right questions, she said.
Seidman noted FASB staff research has unveiled some ideas about how there could be better linkage between discussions about operations and liquidity trends. “It is absolutely appropriate for us to share that with the SEC as a potential area for improvement,” she said. Once FASB makes improvements to the accounting requirements, “then it becomes a compliance issue,” she said.
The board agreed it will develop a proposed update to accounting standards that will be exposed for a 90-day public comment period. FASB has not established a proposed effective date, but will ask entities in the proposal to project how much time they think they will need to comply with the new data disclosures. The proposal will not call for retrospective disclosures, so entities will only need to apply it on a going forward basis, the board determined.