The Governmental Accounting Standards Board issued a preliminary views document on March 31 regarding proposals associated with accounting and financial reporting for severe financial stress and probable dissolution disclosures.
The document, Severe Financial Stress and Probable Dissolution Disclosures, was released to provide the GASB’s current views at a relatively early stage of the project and to spark comments from stakeholders—including issuers, auditors, and users of those financial reports—on the proposals. The goal is to address issues related to disclosures regarding going concern uncertainties and severe financial stress with the intention of making clarifications and improvements to the existing going concern guidance to reduce diversity in practice and providing guidance for disclosures related to severe financial stress.
According to the GASB, the severe financial stress guidance would be focused on a government’s financial condition, regardless of whether there’s uncertainty about its continued existence. The probable dissolution guidance would be focused on the uncertainty about a government’s continued existence, regardless of its financial condition.
GASB’s current guidance on going concern uncertainties was brought into the board’s literature without significant changes from the AICPA’s literature and contains elements of both financial stress and continued existence. However, research showed that stakeholders were unclear on what going concern means in the government context. According to the GASB, some governments get into financial difficulties but continue to exist and provide services. There are also governments that dissolve and cease to exist for reasons other than financial stress—for example, to realize greater efficiency and cost savings through governments merging or combining operations.
The preliminary views document looks to separate the notions of financial stress and continued existence and sets out the GASB’s early thinking on issues associated with severe financial stress and probable dissolution disclosures.
If a government meets either the severe financial stress or probable dissolution disclosure requirement, the government would be required to make certain disclosures related to the severe financial stress or probable dissolution. In some cases, a government may meet requirements for both severe financial stress and probable dissolution and would be required to make both sets of disclosures.
Severe financial stress disclosures
A government would be required to make severe financial stress disclosures if, as of the financial statement date, it’s experiencing financial stress at such a degree that it’s near or at the point of insolvency, regardless of whether it will continue to exist, the GASB said. The point of insolvency would be when a government generally isn’t paying or is unable to pay its liabilities as they come due. A government near the point of insolvency would be experiencing a very high level of financial stress but would not be insolvent.
Severe financial stress disclosures would be the reasons and causes for the condition, the government’s evaluation of the significance of those reasons and causes, the actions taken by the government in response, and the known effects of the condition, according to the GASB.
Probable dissolution disclosures
A government would be required to make probable dissolution disclosures if it’s probable that it will cease to exist as the same legally separate entity within 12 months of the date the financial statements are available to be issued, regardless of its financial condition, the GASB said. Relevant factors would be evaluated in the aggregate to determine the likelihood of the dissolution within the time frame.
The probable dissolution disclosures would be a statement that dissolution is probable, the reasons and causes for the probable dissolution, the government’s evaluation of the significance of those reasons and causes, the actions taken by the government in response, and information about the recoverability, amounts, or classification of assets and liabilities, according to the GASB.
The board is asking stakeholders to review and provide input on the preliminary views document by June 30, 2025. Comments may be submitted either through a comment letter or an electronic input form.
A series of public forums on the preliminary views has been scheduled to enable stakeholders to share their views with the GASB. Additional information on the public forums is available in the document.
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