After years of deliberating how to get more information out of management when the company may be dangerously close to collapse, the Financial Accounting Standards Board has issued a proposed Accounting Standards Update to establish new requirements.

The proposal would require a company to evaluate at each reporting period whether there are uncertainties about the company's ability to remain in business as a going concern. The standard would say a company should start providing warning if it determines it is more likely than not that it will not be able to meet its obligations within 12 months of the financial statement date without taking extraordinary measures to keep the company afloat.

Companies also would be required to issue a warning if it is known or probable that the company will falter within 24 months without extraordinary measures. FASB says companies would be expected to take into account any mitigating conditions or events, but it would not consider the potential effects of management's plans to rescue the company in deciding whether disclosures are warranted.

Currently, financial statements prepared under U.S. Generally Accepted Accounting Principles with the presumption that the business is a going concern. Auditors are required to assess whether they believe investors should be alerted that the company may be headed for trouble, but management is under no requirement to give any signal. The Public Company Accounting Oversight Board also has considered updating requirements for auditors.

FASB Chairman Leslie Seidman said in a statement the board has heard concerns from users of financial statements that footnotes carry a wide variety of disclosures about uncertainties regarding whether the company can remain a going concern. “This proposal seeks to address those concerns by clarifying management's responsibilities about evaluating and disclosing going concern uncertainties, while improving the timeliness and quality of footnote disclosures about them,” she said.

The proposal would require management to evaluate going concern uncertainties more frequently, prescribe a threshold and related guidance for when an entity should begin making going concern disclosures, require an assessment period of 24 months after the financial statement date, and provide a threshold specific to public companies that report to the Securities and Exchange Commission.

FASB began its journey to establish a standard in GAAP for alerting investors in 2007 with the intention to essentially codify for management what auditors are required to do under auditing standards. An initial proposal in 2008 was criticized as requiring more clarity around time lines and criteria that would compel disclosure. The board went back to the drawing board and then meandered through various ideas about how the project should be focused and whether it should be considered in conjunction with other reporting requirements, such as disclosures on liquidity risk and financial instruments.

The current proposal is open for comment through Sept. 24.