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FRC issues draft guidance on going concern for non-Code companies

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15 Oct 2015

The Financial Reporting Council (FRC) has today published an Exposure Draft of best practice guidance on the going concern basis of accounting and reporting on solvency and liquidity risks for companies that do not apply the UK Corporate Governance Code (‘non-Code companies’). Comments are invited until 15 January 2016.

In June 2012 the Panel of the Sharman Inquiry published its Final Report and Recommendations on Going Concern and Liquidity Risk. Key recommendations from the Panel included the need for clarification of the accounting and stewardship purposes of the going concern assessment and disclosure process and an encouragement that companies do not only highlight disclosures about going concern risks when there exists significant doubts about a company’s survival. The FRC implemented the Sharman Panel recommendations as part of its 2014 update to the UK Corporate Governance Code and also published supporting Guidance on Risk Management, Internal Control and Related Financial and Business Reporting in September 2014.  At the same time, the FRC indicated that it would issue separate, simplified guidance for non-Code companies.

The Exposure Draft contains draft guidance for those companies that do not apply the UK Corporate Governance Code.  Some companies apply the Code because they are required to do so (e.g. premium listed companies) and others do so voluntarily (e.g. some companies with a standard listing and some AIM companies). The Exposure Draft addresses all other companies excluding small and micro companies. This spans a range including large and medium-sized privately-owned businesses and most AIM companies.

The draft guidance is not mandatory for non-Code companies but is intended to act as a practical aid and a simplified version of the going concern elements of the 2014 update to the Corporate Governance Code. Notably there is no requirement for non-Code companies to produce a longer-term viability statement, required by Code companies for periods commencing on or after 1 October 2014. The draft guidance replaces the FRC’s Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 and An Update for Directors of Companies that Adopt the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 (links to FRC website).  It incorporates recent developments in the corporate reporting framework, most notably the introduction of New UK GAAP and the strategic report

Small and micro companies have been scoped out of the guidance but may find parts of it to be a useful in making their going concern assessment.

The draft guidance includes:

  • An overview of existing legal requirements for disclosures in the strategic report on principal risks and uncertainties and of existing requirements of accounting standards for disclosure in the financial statements on the going concern basis of accounting.
  • Guidance to aid non-Code company directors in making their assessment as to whether the use of the going concern basis of accounting is appropriate when preparing the financial statements, including consideration of material uncertainties and the assessment period chosen.
  • The reporting requirements for the various scenarios that may result from the going concern assessment. The draft guidance clarifies that there are no specific disclosure requirements for financial statements when the going concern basis is appropriate and when there are no material uncertainties (this differs from the 2009 Guidance which encouraged disclosure of any uncertainties).
  • Factors that may be relevant when considering threats to solvency and liquidity as part of the directors’ assessment of risks and uncertainties faced by the company bearing in mind that the strategic report must include a description of principal risks and uncertainties and how these are managed and mitigated.

The press release and Exposure Draft: Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks – Guidance for companies that do not apply the UK Corporate Governance Code are available on the FRC website.

Our Need to Know publication is available here.

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