The FRC has published its final guidance on the going concern basis of accounting and reporting on solvency and liquidity risks for companies that do not apply the UK Corporate Governance Code (the “Code”). The guidance replaces the FRC’s Going concern and liquidity risk: guidance for directors of UK companies 2009 and An update for directors of companies that adopt the Financial Reporting Standard for Smaller Entities (FRSSE): going concern and financial reporting.
The FRC guidance stems from the FRC’s Sharman Panel’s original final report and recommendations on improvements to the reporting of going concern and liquidity risks published in 2012. Following two consultations in 2013 on improvements to the Sharman Panel’s recommendations for those companies within the scope of the Code, which resulted in the FRC’s 2014 amendments to the Code, the FRC determined to issue separate, simplified guidance for companies that do not apply the Code. The FRC published draft guidance for consultation, which closed on 15 January 2016, and the final guidance is the response to the feedback the FRC received to its consultation.
The non-mandatory guidance, which brings together the relevant requirements of company law, accounting standards, auditing standards, other regulation and existing FRC guidance relating to reporting on the going concern basis of accounting, and solvency and liquidity risks, aims to assist directors of companies that do not apply the Code in the practical application of these requirements.
The guidance includes:
- factors to consider when making disclosures on the going concern basis of accounting and material uncertainties in their financial statements and disclosures of the principal risks and uncertainties, which may include risks that might impact solvency and liquidity, within their strategic report;
- guidance on the assessment periods for the going concern basis of accounting and solvency and liquidity risks; and
- guidance on the assessment process; and
- a summary of the related reporting requirements.
While the content of the final guidance remains substantially the same as the draft guidance, changes to the draft guidance include:
- revising the structure of the guidance to introduce icons and colour-coded boxes to improve the differentiation between mandatory requirements derived from law, accounting standards or other regulation and best practice guidance;
- incorporating additional examples to illustrate key concepts and key focus areas for directors to consider when making their assessments of the appropriateness of the going concern basis of accounting and the solvency and liquidity risks facing the company;
- clarifying that small companies and micro entities are outside the scope of the guidance on the basis that there is no explicit requirement under UK GAAP and such companies are not required to prepare a strategic report;
- including a table for small companies and micro entities which summarises the requirements for each type of company and highlights the sections of the guidance that may assist directors in meeting those requirements;
- expanding the guidance on (a) providing a true and fair view, which includes example scenarios, and (b) reporting material uncertainties regarding the appropriateness of the going concern basis of accounting;
- setting the guidance on reporting on solvency and liquidity risk in the context of the requirement to prepare a strategic report and disclose principal risks and uncertainties;
- incorporating additional guidance to highlight the type of factors that may give rise to solvency and liquidity risks, including operational, competitive, market and regulatory factors;
- modifying the guidance relating to the length of the assessment period for solvency and liquidity risks, to provide that the period will usually be longer than 12 months from the authorisation for issue of the financial statements, and to recognise that the length will vary depending on the type and circumstances of the company concerned; and
- adding guidance to make it clear that when the directors have concluded that there is no material uncertainty regarding the appropriateness of the going concern basis of accounting, the assessment of principal risks and uncertainties may still identify risks that impact solvency and liquidity.