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ASC 275, Risks and Uncertainties, requires entities to disclose information about risks and uncertainties in their financial statements in the following areas:
  • Nature of operations
  • Use of estimates in the preparation of financial statements
  • Certain significant estimates
  • Current vulnerability resulting from certain concentrations
An estimate should be disclosed when known information available before the financial statements are issued (or are available to be issued for private companies) indicates that both of the following criteria are met:
  • It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events.
  • The effect of the change would be material to the financial statements.
Companies considering a bankruptcy filing face unique challenges from an operational and financial perspective. Entities should consider disclosure of these difficulties and the potential for a bankruptcy filing under ASC 275. This could include the state of the operations and any restructuring or exit activities initiated to increase liquidity. Also, companies should disclose their vulnerability to and impact of macroeconomic factors or industry challenges. SEC registrants may have additional disclosure requirements, some of which are highlighted in BLG 2.10.1 through BLG 2.10.4.

2.10.1 Going concern assessment (pre-bankruptcy)

For each annual and interim reporting period, a reporting entity should evaluate whether there are conditions that give rise to substantial doubt about the reporting entity's ability to continue as a going concern within one year from the financial statement issuance date, and if so, provide related disclosures. Accordingly, SEC registrants with interim reporting requirements should assess going concern uncertainties quarterly. Nonpublic entities should assess going concern uncertainties annually, or more frequently if they issue interim financial statements that are prepared under US GAAP. Conditions that give rise to substantial doubt ordinarily relate to a reporting entity's ability to meet its obligations as they become due. Management's assessment should be based on the relevant conditions that are "known and reasonably knowable" at the issuance date, rather than at the balance sheet date. ASC 205-40, Going Concern, requires management to consider information about the following conditions, among others, as of the financial statement issuance date:
  • The reporting entity's current financial condition including its current liquid resources
  • Conditional and unconditional obligations due or anticipated in the next year
  • Funds necessary to maintain operations considering the reporting entity's current financial condition, obligations, and other expected cash flows in the next year
  • Other conditions that could adversely affect the reporting entity's ability to meet its obligations in the next year
If conditions give rise to substantial doubt in the initial assessment, management should consider its plans and their mitigating impact. In doing so, management should assess whether its plans to mitigate the adverse conditions, when implemented, will alleviate substantial doubt. Disclosures are required if conditions give rise to substantial doubt, even if the substantial doubt is alleviated by management's plans. Whether or not substantial doubt is alleviated, footnote disclosures should focus on pertinent information about significant conditions that are specific to going concern uncertainties, management's evaluation of those conditions, and management's plans. SEC registrants may use Management's Discussion and Analysis to complement and expand upon footnote disclosures by providing additional context about the potential causes and effects of going concern uncertainties.
See FSP 24.5 for discussion of a reporting entity's required going concern assessment and the related disclosures.

2.10.2 Asset impairment disclosures (pre-bankruptcy)

Disclosure of the potential for material write-downs of assets, including deferred tax asset valuation allowances, is of importance to investors even if an impairment has not been recognized. Additionally, more transparent disclosure is often required related to both the methods and assumptions used in impairment testing. For example, the SEC staff has requested that registrants consider the following disclosures:
  • “Foreshadowing” disclosures in periods prior to impairment
  • The facts and circumstances that resulted in an impairment, as well as information about the existence of triggering events. If such disclosures are not provided, the timing of the reporting entity's impairment charge may be questioned
  • Whether the reporting entity's expectations for future earnings or cash-flow projections have changed, and the factors that may have changed and consequently resulted in a goodwill balance that could not be supported. Disclosure of what the impairment did not impact—such as cash flows or debt covenants—is not as useful as disclosure about what was impacted
  • Where no current impairment exists, the occurrence of future events or deteriorating conditions that could result in a future impairment, as well as a sensitivity analysis to show the impact that changes in assumptions could have on the outcome of the impairment test
  • The reporting units at which goodwill is tested for impairment and the methodologies used to determine the fair values of the reporting units (as well as a reconciliation of the total fair value of all reporting units to the total market capitalization), including sufficient information to allow a reader to understand why management selected these methods
  • Reporting units that are at risk for failing step one of the goodwill impairment test, including the carrying amounts and sensitivity analyses of the reporting units’ fair values
This type of information provides detailed disclosures about the methods and assumptions used in the asset impairment testing and any indicators that an impairment charge may be required in the future.

2.10.3 Restructuring and exit activity disclosures (pre-bankruptcy)

Management often undertakes restructuring and exit activities to increase liquidity and profitability in the period prior to a bankruptcy filing. SEC staff comments about registrants' disclosures related to these activities typically fall into the following areas:
  • Identify the specific facts and circumstances related to the restructuring and exit activities
  • Include required disclosures under the applicable GAAP
  • Provide separate rollforwards of activity for each restructuring plan
  • Explain the basis for any significant adjustments to the recorded reserves (as this could indicate the initial accounting is incorrect)
  • Include the impact of restructuring activities in the liquidity section of MD&A
  • Provide support for the timing of recording restructuring or impairment charges (a foreshadowing disclosure is a helpful “trail” in situations where restructuring or impairment is expected in the near future)

2.10.4 Liquidity disclosures (pre-bankruptcy)

Additional disclosures in MD&A related to liquidity may be necessary when a public entity contemplates a bankruptcy filing. Further, users of the financial statements will need to better understand management's plans to increase liquidity and remain a going concern. Thus, disclosures in the financial statements will help users to assess management's plans and make investment decisions. The disclosures are especially important if the reporting entity continues to incur significant operating losses or cash outflows from operations and where bankruptcy appears to be possible because of liquidity constraints and the inability to raise additional capital.
SEC staff comment letters tend to be focused on debt agreements and a reporting entity's compliance with its outstanding debt covenants and potential default conditions. Comment letters include requests for additional disclosures in the following areas: (1) the terms of the most restrictive debt covenants; (2) any stated events or defaults that would permit the lenders to accelerate the debt if not cured within applicable grace periods, including the failure to make payments under the agreement; (3) a tabular presentation of any significant required ratios as well as actual ratios as of the reporting date; and (4) the computations used to arrive at actual ratios and any corresponding reconciliations to US GAAP amounts, if necessary.
Liquidity disclosures should also be considered where a reporting entity has a committed credit facility. These disclosures would include an evaluation of whether there are limitations on the reporting entity's ability to borrow the full amount and whether the limitations may become an issue in the near term.
Another area of frequent SEC staff comment is the adequacy of disclosures related to a reporting entity's foreign investments. As described in BLG 2.6.1, a looming bankruptcy proceeding may put pressure on a reporting entity's ability to continue to maintain its indefinite reinvestment assertion for the outside basis difference attributable to its foreign subsidiaries resulting in the need to recognize current and deferred income taxes.
Other potential disclosures include future plans for raising capital, any anticipated issues in accessing capital markets, and how the business would be impacted if capital cannot be raised.
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