In April, the Financial Reporting Council (FRC) in the UK published Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks for directors of companies which do not apply the UK Corporate Governance Code.
According to the FRC, the guidance is intended to serve as a proportionate and practical guide for directors of non- Code companies. It brings together the 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 and reflects developments in the FRC’s thinking as a consequence of the Sharman Inquiry. It incorporates recent developments in the corporate reporting framework, most notably the introduction of new UK and Ireland GAAP and the strategic report.
It includes:
- factors to consider when determining whether the going concern basis of accounting is appropriate (section 3) and making an assessment of the solvency and liquidity risks facing a company that might constitute principal risks for disclosure in the strategic report (section 4);
- guidance on the assessment periods for the going concern basis of accounting (section 3) and those risks (section 4);
- guidance on the assessment process (section 5); and
- summaries of related reporting requirements (sections 3 and 4).
According to the FRC, the guidance:
- encourages directors to take a broader view, over the longer term, of the risks and uncertainties that go beyond the specific requirements in accounting standards;
- acknowledges that companies will have risk management and control processes in place that will underpin the assessment and that the degree of formality of this process will depend on the size, complexity and the particular circumstances of the company; and
- uses the term ‘going concern’ only in the context of referring to the going concern basis of accounting for the preparation of financial statements.
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 guidance is non-mandatory, best practice guidance to assist the directors of all companies within its scope with the application of the requirements:
- to make disclosures on the going concern basis of accounting and material uncertainties in their financial statements; and
- disclose principal risks and uncertainties, which may include risks that might impact solvency and liquidity, within their strategic report.
Companies that are required or choose voluntarily to apply The UK Corporate Governance Code are excluded from the scope of the guidance.