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FRC publishes final guidance on going concern for non-Code companies

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18 Apr 2016

The Financial Reporting Council (FRC) has today published 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.

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 companies that do not apply the UK Corporate Governance Code.

An Exposure Draft of guidance was issued by the FRC in October 2015 and the FRC now issues the guidance in its final form.

The non-mandatory guidance is intended to act as a best practice aid to directors of 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 guidance 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 best practice guidance brings together the requirements of company law, accounting standards, auditing standards, other regulation and existing FRC guidance related to reporting on the going concern basis of accounting. It also deals with the assessment and disclosure of solvency and liquidity risks in the context of the principal risks and uncertainties included in the strategic report.  

In particular the guidance is intended to assist company directors in assessing:

  •  the going concern basis of accounting, material uncertainties, solvency and liquidity risk;
  •  the periods of assessment required for the above; and
  •  any relevant disclosure requirements. 

Although small and micro-companies must assess whether the going concern basis of accounting is appropriate in preparing their financial statements, they are specifically excluded from the scope of the guidance on the basis that:

micro-companies applying FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime are not required to provide any disclosures on the going concern basis of accounting, as their financial statements are presumed, in law, to give a true and fair view if the (minimal) legal disclosure requirements are met;

small companies applying Section 1A Small Entities of FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland are not required to provide disclosures on the going concern basis of accounting, although their directors are encouraged to provide such disclosures, where appropriate, in meeting their responsibility to prepare financial statements that give a true and fair view; and

they are not required to prepare a strategic report.

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