The Financial Reporting Council (FRC) recently published a consultation on draft updated guidance to directors of companies applying the UK Corporate Governance Code, on going concern, risk management and internal control. It also proposes associated amendments to the UK Corporate Governance Code. The guidance will apply to companies that apply the Code because they are required to do so or choose to do so voluntarily.

The FRC has decided to bring together its previous guidance on these matters in one place to encourage boards, as part of the same on-going process, to consider risk identification and management, including the assessment of solvency and liquidity risks, and to determine whether the company is able to adopt the going concern basis of accounting.

The main elements which the guidance addresses include:

  • Board responsibilities for managing risk, factors the board should consider in exercising those responsibilities and the assessment of risks
  • In the assessment of going concern, consideration of solvency and liquidity over long periods having regard to the evolution of the company’s own business cycles and the economic cycle
  • Auditors’ obligation report if they have anything to add to what is included in the annual report and accounts in relation to solvency and liquidity risks and going concern
  • A new ‘comply or explain’ provision in the Code requiring the board to “carry out a robust assessment of the principal risks facing the company, including those that would threaten its solvency and liquidity”
  • The consultation closes on 24 January 2014. The new guidance and consequential changes to the Code will be applicable for accounting periods commencing on or after 1 October 2014.