In March 2009, the Financial Reporting Council published a paper entitled “An update for directors of companies that adopt the Financial Reporting Standard for Smaller Entities (FRSSE): Going concern and financial reporting.” The paper is aimed at directors of smaller companies which fall within the small companies' regime set out in the Companies Act and which choose to apply the FRSSE.
The purpose of the update is to summarise the criteria that must be met in order to produce accounts on a going concern basis and to identify some basic procedures that may be used to support conclusions on going concern.
While smaller companies may elect not to have an audit and/or may file abbreviated accounts with the Registrar of Companies, they are required to produce annual accounts that give a true and fair view of the assets, liabilities, financial position and profit or loss of the company. In this context, the FRSSE requires directors to:
- assess whether there are significant doubts about the entity’s ability to continue as a going concern;
- disclose any material uncertainties of which they are aware in making their assessment; and
- disclose where the period they have considered in making this assessment has been limited to a period of less than one year from the date of approval of the annual accounts.
Although the update does not introduce any new requirements, it does suggest some procedures that directors may wish to carry out in assessing whether it is reasonable to use the going concern basis of accounting as well as suggesting some additional disclosures directors may wish to include in the annual accounts including:
- preparing a budget, trading estimate, cashflow forecast or similar analysis for the forthcoming year (or for a longer period) which should identify the most significant assumptions underlying the forecast and any reasonably possible adverse changes thereto;
- summarising the key conditions attached to any existing bank facilities or credit arrangements and considering the impact of reasonably possible adverse changes to these; and
- seeking confirmation from bankers and other lenders whether it is reasonable to assume that loans and/or overdrafts will continue to be available to the company.
View FRC update for directors of companies that adopt FRSSE (8 page pdf).