In today's economic climate, companies and accounting firms that give opinions on their clients' financial statements are sure to face new and significant challenges.Determining fair value, new policies regarding loan covenants and going-concern considerations are chief among them. This article takes a brief look at each of these challenges.


The move by the Financial Accounting Standards Board to fair value measurement has been taking place over the past decade. However, the global financial market crisis, which especially came to light during the fourth quarter of 2008, has brought FASB No. 157, Fair Value Accounting, under particular scrutiny.

FASB 157 became effective for most U.S. companies on Jan. 1, 2008. Some believe that FASB 157 contributed to financial institution failures, while others maintain that mark-to-market accounting did not cause the problem, but instead revealed the problem.

On Oct. 10, 2008, FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, to provide additional guidance on implementing FASB 157 in the current economic environment. The new staff position clarifies that using a reporting entity's own assumptions when valuing financial instruments is appropriate when the market for those instruments is inactive.

However, the reporting entity's own assumptions are typically based on unobservable inputs, the lowest level of valuation confidences. This may result in lower write-downs, but investor confidence may be adversely affected by an increase in assets valued with unobservable inputs, which are primarily based solely on management's internal assumptions.


Both public and private companies may, during certain cyclical times, fall out of compliance with their loan covenants. These can be financial covenants, such as minimum net worth requirements, or financial reporting timelines for providing annual audited, reviewed or compiled financial statements to lenders. In the past, most banks have provided temporary waivers of default for their clients as long as debt service payments were being made.

With the tightening of the credit markets and the uncertainty of the economy, however, it is predicted that during 2009, banks will not be so lenient when providing these waivers of default, may charge additional fees or, in worst-case scenarios, may issue notices of default or not provide annual line-of-credit renewals. It's important to meet with bankers as early as possible and discuss any covenant concerns up front, even if it is only not meeting a financial reporting timeline.


FASB has issued a proposed standard on going concerns.

The existing going-concern concept assumes that a company will remain in existence for 12 months past the balance sheet date. In an ever-continuing effort to converge with International Financial Reporting Standards, the proposal aligns the time horizon for assessment from one year beyond the balance sheet date to IFRS Standard No. 1, which requires an entity to consider "all available information about the future, which is at least, but not limited to, 12 months from the end of the reporting period."

The proposal also reiterates that it is management's responsibility to assess the ability of the entity to continue as a going concern. The proposal further provides for additional disclosures in certain circumstances when an entity's financial statements are not prepared on a going-concern basis. In light of the economic crisis and the tightening of credit markets, going-concern considerations may unfortunately affect many companies in 2009.

Surely, uncertain times will bring a host of challenges to both accountants and business owners. Planning for and giving careful consideration to these challenges is vital - not only for the coming year, but well into the future.

Nicole Mannarino is a partner in the commercial and SEC assurance practice area of Rachlin LLP (

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