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The Bruce Column — The viability of a viability statement

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19 Sep 2014

The new UK Corporate Governance Code clarifies changes to the concept of a ‘going concern’ and opens up a new vista of longer term viability statements. Our regular, resident, columnist Robert Bruce reports on what it all means.

It has taken a longer time than we all expected but the Financial Reporting Council has finally, at the third time of asking, come to a conclusion on where the issues of going concern and the longer term viability of companies should stand in the UK Corporate Governance Code. It seems a long time since Lord Sharman took on the task of making the whole concept of going concern more robust after criticisms following the financial crisis. It might have been expected to be a relatively straightforward process. But agreement was hard to achieve.

Yet, with the new revised Code now issued by the FRC, the arguments should quieten. There are now two different lines of action. The idea of going concern remains a relatively simple accounting test. The broadening out of the whole idea of the security of a company’s future that Sharman wanted is now what is to be called a longer term viability statement.

Boards need to provide two statements. The first says simply that the directors have considered, and disclosed and identified any material uncertainties, and so it is appropriate to adopt a going concern basis for the year from the point that they approved the accounts.

The second is the new viability statement. Here directors need to say that they have assessed the prospects of the company, state how long a period ahead this covers, and why they have chosen this particular period. And they also have to say whether they think they have a reasonable expectation that the company will be able to continue to operate over that period. They need to base this on a robust assessment of the risks ahead, ‘including its resilience to the threats to its viability posed by those risks in severe but plausible scenarios’.

That widens out the thinking of boards of directors. ‘Directors,’ says the guidance, ‘are encouraged to think broadly as to relevant matters which may threaten the company’s future performance and so its ability to continue in operations and remain viable’.  And all of this, while not being open-ended, takes the period being reported about far beyond what previously might have been thought a comfort zone. The guidance says that: ‘Except in rare circumstance it should be significantly longer than 12 months from the approval of the financial statements’. And it is up to companies themselves to decide what length of time they want to comment on. And will a competitor, you wonder, seek to gain an advantage by lengthening the period, which might as the months go by become a disadvantage? There will be a lot of judgement involved here. But it will create a clearer picture for users of accounts.

As the FRC’s CEO Stephen Haddrill made clear in his comments at the annual FRC open meeting, held the day the Code was released, all this was in response to the criticism that during the financial crisis there was little reported which clearly suggested that there were problems ahead.

And the guidance also makes it clear that no one expects the simple existence of a viability statement to make things definite and perfect over the longer term. ‘Reasonable expectation’, it says, ‘does not mean certainty. It does mean that the assessment can be justified. The longer the period considered, the greater the degree of certainty can be expected to reduce’.

Over time this will allow for greater flexibility and thought around these statements. But their very existence puts UK reporting ahead of the game internationally. And the FRC deserves praise for that.

Best practice, as it emerges, will enhance the whole process.

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