The Financial Reporting Council (FRC) in the UK has announced that it intends to implement a number of proposals suggested by Lord Sharman in his 2012 Final Report on going concern. This follows a consultation / feedback exercise on the implementation by the FRC of Lord Sharman's Report entitled "Going Concern and Liquidity Risks: Lessons for Companies and Auditors".

The 2012 Report listed 5 recommendations in this area as follows:

  • Recommendation 1: The FRC should take a more systematic approach to learning lessons relevant to its functions when significant companies fail or suffer significant financial or economic distress but nonetheless survive, for example through selective inquiries conducted by the FRC.

  • Recommendation 2: A common international understanding of the purposes of going concern assessment, disclosures and related thresholds and descriptions, should be agreed which should be consistent throughout accounting and auditing standards, in FRS 18 and ISA (UK & Ireland) 570, throughout the UK Corporate Governance Code and related guidance for directors and auditors, and in the UK Listing Rules.

  • Recommendation 3: The FRC’s Going Concern and Liquidity Risks: Guidance for Directors of UK Companies should be reviewed to ensure that the going concern assessment is integrated with the directors’ business planning and risk management processes. It should include a focus on both solvency and liquidity risks, and include stress tests both in relation to solvency and liquidity risks that are undertaken with an appropriate level of prudence, with special consideration given to the impact of risks that could cause significant damage to stakeholders.

  • Recommendation 4: The FRC should move away from a model where disclosures about going concern risks are only highlighted when there are significant doubts about the entity’s survival. Instead the discussion of a company’s strategy and principal risks should always include the directors’ going concern statement and how they arrived at it, and the audit committee report should illustrate the effectiveness of the process undertaken by the directors to evaluate going concern.
  • Recommendation 5: UK auditing standards should include an explicit statement in the auditor’s report as to whether the auditor has anything to add to or emphasise in relation to the disclosures made by the directors about the directors’ going concern assessment process and outcome.

The FRC has announced that it will take up a number of proposals and will:

  • Issue separate, simplified guidance for SMEs following feedback that recommendations for SMEs could be more proportionate;

  • Make a clearer distinction as to the meaning of going concern in the context meant by the Sharman panel. The feedback highlighted that the use of "going concern" to describe both the specific assessment required when preparing the financial statements and the broader assessment of the risks affecting a company's viability was confusing. The FRC says it will consult on whether changes to the UK Corporate Governance Code are needed to make the distinction clearer. If so, they will take effect from October 2014.

  • Make a clearer link between the assessment of business viability risks and the broader risk assessment that should form part of a company's normal risk management and reporting processes. The FRC will consider this in the development of the Corporate Governance Code and related guidance on risk management and internal control.

The FRC says it will issue further consultation documents later in 2013 covering SMEs, proposed changes to the Corporate Governance Code and integrated going concern and risk management Code guidance.