Accounting Standards Codification 275 (ASC 275) was released to address the more specific topic of risks and uncertainties and how these should be disclosed.
In the financial statements, there is a separate section in which the business lists the relevant risks. These risks are then to be considered by investors when making decisions, to increase the efficiency of the investors individual research. This also illustrates management’s ability to accurately manage and be aware of the risks that are present.
Risk Disclosure Checklist under ASC 275
The following items are to be addressed when preparing financial statements in accordance with the standard:
- The operations of the business, including the products and services which drive said business, the principle markets in which they are in, locations, and how management determines relative importance of each.
- As management estimates represent a risk to investors, the company must disclose which areas have been estimated by management. Those significant and material estimates that were used, that could change in the near term based on certain confirming events taking place should be disclosed. One method for addressing this would be to create a range of possible gain or loss based on the changes to the estimates, or state that these estimates cannot be made.
- Risks which arise due to concentration of business with a small number of customers, vendors, lenders, etc. Because these are concentrated on such a small group, changes to those outside entities can impact the results of the company.
- Risks due to concentration of labor, materials, or other inputs associated with major products or services, including certain collective bargaining agreements
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