16 Ott Going Concern Accounting – FRC Consultation
The Sharman Inquiry made a number of recommendations in respect of going concern and liquidity risk reporting. These recommendations were taken forward in 2014 for companies which fall within the immediate scope of the UK Corporate Governance Code. Now the Financial Reporting Council (FRC) has issued a consultation in respect of similar guidance for non-code companies.
Although the new guidance is not intended to apply to small and micro-companies which do not have to prepare a strategic report, the FRC hopes that these smaller companies may also find it useful when assessing going concern reporting and considering whether additional disclosures may help to provide a true and fair view of the company. Comments on the recommendations are invited by 15th January 2016.
In essence, the recommendations cover two areas. Firstly, in line with the FRC’s drive to encourage companies not only to report on their current position but also on their expected future prospects, the recommendations encourage directors to go beyond the specifics required within accounting standards and to take a broader view over the long-term. Secondly, when considering the going concern basis of accounting the FRC encourages companies to modify their assessments, risk management and control processes in the light of the particular circumstances of the company including its size and complexity.
The draft guidance covers a range of areas which are designed to assist directors in making a full and appropriate assessment and identifying the principal risks and uncertainties which are relevant to the company. Factors for consideration include forecasts and budgeting, the timing of cash flows, sensitivity analysis, financial and operational risk management and the economic environment in which the company operates. The guidance also looks at the responsibilities of auditors relating to the adoption of a going concern basis of accounting and related disclosures.
As with other guidance issued by the FRC, the overriding consideration is for directors to ensure that the financial statements give a true and fair view of the company. This means that should regulatory disclosures be insufficient to provide a true and fair view, directors need to consider whether additional disclosures are required. Those companies which are required to provide a strategic report, which by its very nature is a forward-looking document, should ensure that the principal risks and uncertainties are clearly laid out in order to provide investors with a good assessment of the company’s future prospects.