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UK Sharman inquiry calls for global consistency in interpretation of "going concern"

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14 Jun 2012

The United Kingdom Sharman Panel of Inquiry, established at the invitation of the UK Financial Reporting Council (FRC) to consider going concern and liquidity risks, has published its final report and recommendations ('Sharman report'). One of the recommendations is that the FRC should engage with the IASB and IAASB "to agree a common international understanding of the purposes of the going concern assessment and financial statement disclosures about going concern, and of the related thresholds and descriptions of a going concern".

In support of the recommendation, the report builds on observations in the Panel's preliminary report and notes current divergence in the consideration of going concern:

It is important that what constitutes a going concern and the relationships between the elements of information relating to the entity’s going concern status... – and their purposes and the thresholds used – should be clearly and consistently understood and applied. The Panel found that the descriptions of these matters in the various sources (UK GAAP and IFRS, auditing standards, the Code and guidance for directors and auditors) are at worst inconsistent and at best open to different interpretations, and are in fact interpreted differently, by different people. While recognising the judgmental nature of going concern, such inconsistencies may undermine the effectiveness of the assessment process and the disclosure about the entity’s going concern status and may create expectation gaps.

The report also discusses the concept of "prudence" in accounting.  The following observations are included in the section dealing with integrating the going concern assessment with business planning and risk management:

The Panel also heard evidence that IFRS had resulted in a move away from prudence towards neutrality in providing financial information. Prudence involves weighting downside risks more heavily than upside opportunities. The Panel concluded that, although financial reporting may benefit from this shift in terms of enhanced comparability, prudence remains important in making going concern assessments. Therefore, in making such judgments, directors should seek to ensure that the company is solvent and liquid on a prudent basis.

The report discusses a wide range of related topics, such as the role of auditors and the FRC, considering whether there should be a special going concern disclosure regime for banks, and even whether separate financial reporting and auditing regime for banks is warranted.  On this latter point, the report supports the view that such a system would undermine comparability of corporate reports but notes that regulatory requirements for banks permits incremental (and even separate) reporting.

The Sharman report is to be discussed at the forthcoming IFRS Advisory Council meeting, being held in London on 18-19 June 2012 (the Council meeting will also discuss the related topic of the interaction between the IASB and the IAASB).

Click for access to the Sharman report (link to FRC website).

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