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Going concern guidance for companies not applying the UK Corporate Governance Code

05 May 2016

The Financial Reporting Council has issued “Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks: Guidance for directors of companies that do not apply the UK Corporate Governance Code” (the Guidance). The Guidance is intended to help the directors of all relevant companies apply 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.

Who is it for?

The scope of the Guidance excludes both small companies and micro-entities on the basis that they are not subject to the disclosure requirements covered in it. However, those companies may find the Guidance useful when deciding on whether the going concern basis of accounting is appropriate. The Guidance does not apply to companies that have adopted the UK Corporate Governance Code - such companies should refer to the September 2014 publication “Guidance on Risk Management, Internal Control and Related Financial and Business Reporting”.

What does it cover?

While the Guidance is described as ‘non-mandatory, best practice guidance’, it does deal with the mandatory requirements of company law, accounting standards, auditing standards and other regulation.  It also draws on existing FRC guidance relating to reporting on the going concern basis of accounting and solvency and liquidity risks, reflects developments in the FRC’s thinking as a consequence of the Sharman Inquiry and incorporates recent developments in the corporate reporting framework (most notably the introduction of new UK and Ireland GAAP and the strategic report). It 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 includes:

  • Factors to consider when determining whether the going concern basis of accounting is appropriate and making an assessment of the solvency and liquidity risks facing a company that might constitute principal risks for disclosure in the strategic report
  • Guidance on the assessment periods for the going concern basis of accounting and those risks;
  • Guidance on the assessment process
  • Summaries of related reporting requirements.

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. However it does acknowledge 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.

Following publication of this new Guidance, the FRC has withdrawn its previous publications “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”.

Read the new Guidance.