An Analysis of the FASB’s New Going-Concern Standard and Its Relation to Liquidation Basis Accounting Requirements

Whether a company expects to remain in existence for a reasonable time into the future is a fundamental consideration for investors and creditors when evaluating investment alternatives. Investors and creditors are understandably concerned about management’s ability to enhance the capital-providers’ investment, and any doubts about an entity’s future demise or liquidation is decision-useful information for these capital-market participants. To provide investors and creditors with some assurance about a company’s future survival, the accounting standards establish the going-concern assumption. While the going-concern assumption is a foundational underpinning of the financial reporting process, until recently, an entity’s management has had no formal responsibility for evaluating or disclosing conditions about an entity’s ability to continue as a going concern. The burden of assessing the going-concern assumption has historically resided with the entity’s independent auditor, and disclosure of going-concern issues was not required if management was able to satisfy the auditor that the conditions raising uncertainty would be alleviated.