The draft guidance seeks to integrate the FRC current guidance on going concern and risk management and internal control and also makes some consequential revisions to the UK Corporate Governance Code and auditing standards.  The draft guidance will replace ‘Internal Control: Guidance for Directors’ (2005) and ‘Going Concern and Liquidity Risk: Guidance for Directors’ (2009) (both links to FRC website) and it, along with changes to the UK Corporate Governance Code, will be applicable for periods commencing on or after 1 October 2014. 

The UK Financial Reporting Council (FRC) announced in June that it would develop guidance that supported the principles underlying the recommendations advocated by Lord Sharman in his report “Going Concern and Liquidity Risks: Lessons For Companies and Auditors” (link to FRC website).  The FRC identified that the guidance would need to:

• Distinguish more clearly between the specific assessment required when preparing the financial statements and the broader assessment of the risks affecting a company’s viability both of which were referred to as "going concern".
• Link 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 more clearly.

The FRC has concluded that the best way to achieve the above would be to combine its current guidance on going concern and risk management and internal control (often referred to as the “Turnbull Guidance”) and make some consequential revisions to the UK Corporate Governance Code.  They highlight the inter-relationships between risk management and a number of financial statement disclosures including the description of principal risks and uncertainties and the going concern basis of accounting. 

The FRC has taken this approach “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The key areas of the draft guidance are:

• The draft guidance addresses the board’s responsibilities for managing the principal risks facing the company (including risks to its solvency and liquidity), the factors that boards should consider in order to exercise those responsibilities effectively, and how risks are assessed.  The draft guidance also addresses the design and process for reviewing the company’s risk management and internal control system which is largely unchanged from the current guidance.  Boards will still be required to provide a statement explaining their review of the effectiveness of the risk management and internal control systems and the FRC are recommending that the board explicitly explain “what actions have been or are being taken to remedy any significant failings of weaknesses identified from that review”.
• Companies should make an “explicit link” between the information on principal risks and uncertainties reported in the Strategic Report and the going concern disclosures.
• In the process to assess going concern, the “high level of confidence” threshold and the “foreseeable future” terms have been removed.  The assessment period is not necessarily fixed at 12 months.  The draft guidance requires “consideration of solvency and liquidity over longer periods having regard to the evolution of the company’s own business cycles and the economic cycle”. 
• The FRC has issued separate supplementary guidance (‘Guidance for the directors of banks: Solvency and liquidity risks and the going concern basis of accounting’), particularly in the context of the going concern assessment and related disclosure, for banks.    
• Auditors will need to report if they have anything material to add to what the directors’ have included in the annual report and accounts in relation to solvency and liquidity risks and going concern.  This change is reflected in the draft revisions to auditing standards (link to FRC website)published concurrently with the draft guidance.
• The FRC is proposing that a new ‘comply or explain’ provision be added to section C.2 of the UK Corporate Governance Code, stating that “the board should carry out a robust assessment of the principal risks facing the company, including those that would threaten its solvency and liquidity”.  In the annual report the directors will need to “confirm that they have carried out this assessment and explain how the principal risks are being managed or mitigated”.  The directors will also need to indicate which principal risks, if any, “are material uncertainties in relation to the company’s ability to continue to adopt the going concern basis of accounting”.  This will replace the existing provision C.1.1 which requires listed companies to make a “going concern” statement.  

Along with draft guidance, the FRC has also published a feedback statement on their January 2013 proposals to implement the recommendations of Lord Sharman. 

The FRC has stated that it intends to later consult on guidance for those companies that do not apply the UK Corporate Governance Code.  

Comments are on the consultation are invited in writing until 24 January 2014.  

Click for (all links to the FRC website):

• Press release
• Consultation Paper: Risk Management, Internal Control and the Going Concern Basis of Accounting.
• Consultation Paper: Guidance for Directors of Banks on Solvency and Liquidity Risk Management and the Going Concern Basis of Accounting.
• Exposure Draft: Revised Auditing Standards (extracts) ISAs (UK and Ireland) 260, 570, 700.
• Feedback Statement: Implementing the recommendations of the Sharman Panel.
• Governance in brief on the FRC draft guidance