Catherine Bromilow Partner, Corporate Governance Group PWC

Companies that did not make going concern disclosures in their year-end financial reporting can't just call it a day, according to the first edition of a new quarterly newsletter from PricewaterhouseCoopers LLP (PwC) entitled, “To the Point: Current Issues for Boards of Directors.” The publication points to the biggest trends and issues facing boards of directors today. Highlighted in the spring 2009 edition are topics of going concern, counterparty risk and fair value of nonfinancial assets and liabilities.

With economic deterioration having continued through the first quarter of 2009, there is a growing need for directors and management to revisit going concern issues on a continual basis, especially if the company faces the possibility of violating debt covenants or may soon need to refinance debt. While banks once made a common practice of waiving debt covenants, such waivers are no longer a given. Additionally, large tranches of corporate debt will fall due between 2010 and 2012 – and refinancing that debt is not a given.

“The bottom line is that directors will continue to have boardroom conversations about the need for going concern disclosures,” said Catherine Bromilow, a partner with the Corporate Governance Practice at PricewaterhouseCoopers. “And not only at companies with dire earnings or pressing cash flow challenges. The new credit environment means such discussions may need to happen even if boards haven’t expected them,” Bromilow added.

Other important topics addressed in the premier edition of the newsletter include:

• Counterparty Risks: What happens if key customers, suppliers, insurers, business partners, distributors, and other parties the company depends on no longer perform as expected?
• Management faces tough challenges in analyzing the risks associated with counterparties. Among those challenges is the assessment of certain counterparties’ financial and operating stability. 
• Counterparty risk is a known and largely manageable risk, and management can take steps to avoid costly surprises. Directors should assure themselves that counterparty risks are being realistically considered and management is addressing the risks appropriately.
• Fair Value of Nonfinancial Assets and Liabilities: In 2008, a new approach to determining the fair value of financial assets and liabilities took effect. That approach has proved particularly challenging given the declining economy. Key questions are :
• What lessons were learned in measuring the fair value of financial assets and liabilities that can now be applied to nonfinancial assets and liabilities?
• How can audit committees be comfortable that the fair value measurements of significant nonfinancial assets and liabilities are being handled appropriately?

 “The current economic crisis makes it even more challenging for directors to discharge their fiduciary duties effectively, represent shareholders’ interests, and advise management,” added Bromilow. “The new demands of this environment require boards to remain involved, knowledgeable, and proactive. Staying informed is key to help directors understand what they need to do and what pitfalls to avoid.”

For more information and to obtain a copy of the “To the Point: Current Issues for Boards of Directors” newsletter.

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