Subtopic

ASU 275, Risks and Uncertainties, contains one subtopic:

• ASU 275-10, Overall, that provides guidance on disclosures of risks and uncertainties inherent in entity's operations and activities in cases where principal operations have not begun.

This topic recognizes that all entities face risk and uncertainty. The objective of ASC 275 is to provide guidelines that will enable the preparer to screen the many risks and uncertainties faced by entities and focus on those most useful to the readers of the particular entity's report, those that will enable the readers to assess the future cash flows and result of operations. Thus, the topic focuses on screening criteria for risks and uncertainties and the resulting required disclosures.

Scope and Scope Exceptions

The guidance applies to all GAAP financial statements, interim and annual, but not to condensed or summarized financial statements. The guidance does not apply to risks and uncertainties associated with:

• “Management or key personnel
• Proposed changes in accounting principles
• Deficiencies in the internal control structure
• The possible effects of acts of God, war, or sudden catastrophes.”

  (ASC 275-10-15-4)

The Codification points out that there is overlap between this topic and the requirements of the SEC and other Codification topics. The guidance in ASC 275 does not alter any of those requirements.

Practice Alert

While SEC comments do not pertain to nonpublic entities, their comments can often provide valuable guidance. In the area of risks and uncertainties, the SEC has commented that:

• Entities need to provide sufficient information—both qualitative and quantitative—to allow a financial statement user to evaluate the effect those risks may have on results of operations.
• The risk disclosures should not be vague, but identify which aspect of the business is exposed to those risks.
• The entity must identify the actual risks.
• The disclosures should avoid generic risks factors that could apply to any entity and avoid boilerplate language.
• The disclosures should include material risks that currently affect the entity, including cybersecurity risks.
• Entities should be mindful of disclosing risks associated with business activities in areas identified by the U.S. State Department as state sponsors of terrorism.

Nature of Operations or Activities

ASC 275-10-50 requires that entities disclose the major products or services that they sell or provide, the principal markets that they serve, and the location of those markets. For details of the required disclosures, see Appendix B, Disclosure Checklist for Commercial Businesses. (Note these disclosures apply to all entities.)

Use of Estimates in the Preparation of Financial Statements

Financial statements must include an explanation that the preparation of financial statements in accordance with GAAP requires the use of estimates by management. The purpose of this disclosure is to clearly alert users to the pervasiveness of estimates. (ASC 275-10-50-4)

Certain Significant Estimates

Under certain circumstances, ASC 275-10-50 requires disclosures regarding estimates used. See Appendix B, Disclosure Checklist for Commercial Businesses, for details.

Current Vulnerability Due to Concentrations

Vulnerability from concentrations occurs when entities fail to diversify in order to mitigate risk. See Appendix B, Disclosure Checklist for Commercial Businesses, for details of disclosures required from concentration vulnerability.

The potential for severe impact can occur as the result of the total or partial loss of a business relationship, price or demand changes, loss of patent protection, changes in the availability of a resource or right, or the disruption of operations in a market or geographic area. For purposes of ASC 275-10-50, it is always considered reasonably possible in the near term that any customer, grantor, or contributor will be lost and that operations located outside an entity's home country will be disrupted.

For concentrations of labor subject to collective bargaining agreements and concentrations of operations outside an entity's home country, the following additional disclosures are required (ASC 275-10-50-20):

1. For labor subject to collective bargaining agreements, disclosure is to include both the percentage of the labor force covered by collective bargaining agreements and the percentage of the labor force covered by collective bargaining agreements that will expire within one year.
2. For operations located outside the entity's home country, disclosure is to include the carrying amounts of net assets and the geographic areas in which they are located.

Example Disclosure – Geographic Concentration

The Group's operations are conducted in Hong Kong and the PRC. Accordingly, the Group's business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, and by the general state of the PRC economy.

The Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

Other Sources