ASC 205: Presentation of Financial Statements – Comprehensive Guide and Resources

Key Points of ASC 205

Overview

ASC 205 provides the guidelines for how financial statements should be presented. It ensures that financial statements are understandable, comparable, and provide useful information to users.

Objectives of Financial Statements

Understanding the primary objectives of financial statements is crucial. The main objectives are to provide information about the financial position, performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. This includes the need for comparability, verifiability, timeliness, and understandability of financial information.

Components of Financial Statements

Financial statements typically include:

• Balance Sheet: Shows the financial position of an entity at a specific point in time.

• Income Statement: Shows the entity’s performance over a period.

• Statement of Cash Flows: Provides information about the entity’s cash flows.

• Statement of Changes in Equity: Shows changes in equity over the period.

• Notes to the Financial Statements: Provide additional information necessary to understand the financial statements.

Presentation Requirements

ASC 205 outlines specific presentation requirements for financial statements. Knowing these requirements helps ensure compliance and consistency in financial reporting:

• Aggregation and disaggregation of items

• Classification of items into current and noncurrent

• Requirements for presenting comparative information

• Specific line items that must be included in the financial statements

What is Going Concern?

Definition and Importance

The going concern assumption is a fundamental principle under ASC 205 that presumes an entity will continue its operations into the foreseeable future and has no intention or need to liquidate or significantly curtail its business activities. This principle ensures that financial statements are prepared on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. ASC 205-40 specifically provides guidance for management to evaluate and disclose any substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date (PwC Financial Statement Presentation Guide, Chapter 24).

Assessing Going Concern

Management is required to assess the entity’s ability to continue as a going concern at each annual and interim reporting period. This involves evaluating conditions and events that are "known and reasonably knowable" at the issuance date, rather than at the balance sheet date. The assessment includes both quantitative and qualitative factors such as the entity's current financial condition, liquidity sources, conditional and unconditional obligations due within the next year, and other conditions that might adversely affect the entity's ability to meet its obligations. If substantial doubt about the entity’s ability to continue as a going concern exists, management must consider its plans to mitigate these adverse conditions and assess their feasibility and probable effectiveness (PwC Financial Statement Presentation Guide, Sections 24.5.1 and 24.5.2).

Disclosure Requirements

If substantial doubt about the entity’s ability to continue as a going concern is identified, ASC 205-40 requires specific disclosures in the financial statements. These disclosures must include the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events, and management's plans that are intended to mitigate these conditions. Even if the substantial doubt is alleviated by management’s plans, certain disclosures about the underlying conditions and management’s plans are still required, but without an explicit statement of substantial doubt. The guidance also provides examples of management’s plans, such as disposing of assets, borrowing money, restructuring debt, reducing or delaying expenditures, and increasing ownership equity, and it highlights the importance of evaluating these plans' feasibility (PwC Financial Statement Presentation Guide, Sections 24.5.3 and 24.5.4).

For further detailed guidance, refer to the specific sections within the PwC Financial Statement Presentation Guide, Chapter 24 on Risks and Uncertainties and Going Concern.

Reporting Requirements for Different Entities in ASC 205

Public Companies

Public companies are subject to stringent reporting requirements under ASC 205, given their need to provide transparency and consistency in financial reporting to investors and regulators. These entities must adhere to SEC regulations, including additional disclosures mandated by Regulation S-X. For instance, public companies must provide extensive segment reporting and information on major customers as per ASC 280. Moreover, the going concern evaluation for public companies involves rigorous disclosure of any substantial doubt about the entity’s ability to continue operations, along with management’s plans to mitigate these conditions (PwC Financial Statement Presentation Guide, Chapter 24).

Private Companies

Private companies, while also following ASC 205, have slightly relaxed reporting requirements compared to public companies. They are not obligated to follow certain SEC-specific disclosures. For example, private companies do not need to provide segment reporting under ASC 280. However, they must still perform a thorough going concern assessment and disclose relevant information if there is substantial doubt about their ability to continue as a going concern. The disclosure requirements include a description of the conditions or events raising substantial doubt and management’s plans to address them, similar to public companies but without the necessity of aligning with SEC regulations (PwC Financial Statement Presentation Guide, Section 28.9).

Not-for-Profit Organizations

Not-for-profit organizations have unique reporting requirements under ASC 205 that reflect their operational and financial structure. These entities must disclose information pertinent to their funding sources, restrictions on the use of funds, and the purpose of their financial activities. They are exempt from certain requirements applicable to for-profit entities, such as segment reporting. However, they still need to assess and disclose any going concern issues, detailing the conditions that raise substantial doubt and the plans to mitigate such concerns. The aim is to ensure that stakeholders, including donors and grantors, receive a clear understanding of the organization’s financial health and sustainability (PwC Financial Statement Presentation Guide, Chapter 26).

Recent Updates and Amendments in PwC Financial Statement Presentation Guide

The PwC Financial Statement Presentation Guide contains several noteworthy revisions that reflect the latest changes and amendments in accounting standards. Here are some of the significant updates:

Segment Reporting (Chapter 25)

In March 2024, significant content changes were made to Chapter 25 regarding segment reporting. Specifically, content from FSP 25.2 and FSP 25.7 was moved to FSP 25.2A and FSP 25.7A, respectively. Additionally, new guidance related to the application of segment reporting following the adoption of ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," was incorporated into these sections. The case study previously in FSP 25.7.10 was also updated and relocated to FSP 25.8 to reflect these changes​​.

Statement of Cash Flows (Chapter 6)

Chapter 6 received numerous updates in March 2024 to clarify guidance on various aspects of the statement of cash flows. This includes updates to FSP 6.2 summarizing recently issued FASB guidance affecting the statement of cash flows, clarifications on the definition and presentation of cash equivalents and restricted cash in FSP 6.5.2 and FSP 6.5.3, and additional guidance on net reporting in the statement of cash flows in FSP 6.6. Specific guidance was also added on the classification of cash flows associated with centralized treasury functions and derivatives used in net investment hedges​​.

Supplier Finance Programs (Chapter 11)

Following the issuance of ASU 2022-04, "Disclosure of Supplier Finance Program Obligations," new disclosure requirements were added for supplier finance programs. This guidance, effective for fiscal years beginning after December 15, 2022, requires entities to disclose key terms of the program, amounts outstanding, balance sheet presentation, and associated rollforward information to enhance transparency. The amendments apply retrospectively to each period in which a balance sheet is presented, with prospective application for rollforward information effective from fiscal years beginning after December 15, 2023​​.

Crypto Assets (Chapter 6)

In December 2023, ASU 2023-08 was issued, which provides guidance on the accounting and disclosure of crypto assets. This update affects the cash flow presentation of in-scope crypto assets, generally following existing guidance in ASC 230. Specifically, if crypto assets are received as noncash consideration and converted to cash nearly immediately, the cash received must be classified as an operating activity. This update is effective for fiscal years beginning after December 15, 2024, with early adoption permitted​​.

Fair Value Measurements (Chapter 20)

The FASB issued ASU 2022-03 in June 2022, which clarifies that contractual restrictions on the sale of an equity security are not part of the unit of account for the equity security and should not be considered in measuring its fair value. This update is effective for public business entities for fiscal years beginning after December 15, 2023, and for all other entities after December 15, 2024. Additionally, ASU 2018-13 amended certain fair value disclosure requirements, allowing entities to adopt these changes immediately and apply them retrospectively​​.

Equity Method Investments and Joint Ventures (Chapter 10)

Revisions in September 2023 included updates to FSP 10.8 to address disclosure requirements for newly-formed joint venture entities following the adoption of ASU 2023-05. Furthermore, in June 2023, guidance was updated regarding the broader application of the proportional amortization method for investments in tax credit entities, as outlined in FSP 10.4.1.9 and FSP 16.5.4​​.

Common Challenges and Best Practices

Knowing common challenges in applying ASC 205 and best practices for addressing them can be highly beneficial:

• Ensuring consistency in presentation across periods

• Properly classifying and disaggregating financial information

• Handling changes in accounting policies or estimates

Handbooks and Publications

• PWC — Financial Statement Preparation Handbook

• KPMG — Financial Statement Preparation Handbook

• E&Y — No direct publication on FS preparation - We’ve included their handbook on Discontinued Operations below

• Deloitte - TBD

Additional Resources:

FASB: PROPOSED ACCOUNTING STANDARDS UPDATE—PRESENTATION OF FINANCIAL STATEMENTS (TOPIC 205): DISCLOSURE OF UNCERTAINTIES ABOUT AN ENTITY’S GOING CONCERN PRESUMPTION

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