Updated FRC going concern guidance extended to Code companies
The Financial Reporting Council has published updated guidance on the going concern basis of accounting and related reporting. The new guidance applies to all UK companies except small companies and micro-entities.
Purpose
The guidance is non-mandatory, and is designed to assist directors of all companies within its scope in applying relevant company law, accounting, listing rules and other requirements to:
- assess and make disclosures related to the going concern basis of accounting and material uncertainties in the financial statements; and
- disclose principal risks and uncertainties, which may include risks that might impact solvency and liquidity, within the strategic report.
Background
The new guidance was consulted on last year and replaces the FRC's existing Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risk (issued in 2016).
The FRC notes that in recent years, companies have faced a challenging business and corporate reporting environment because of the significant economic and operational uncertainties caused by developments such as the Covid-19 pandemic, geopolitical conflicts and sustainability-related risks. In the UK, there have also been several high-profile corporate collapses. As a result, reporting on the going concern basis of accounting and solvency and liquidity risks has been under focus and reporting practice has evolved. This updated guidance incorporates changes to reflect these developments.
What has changed?
Key changes from the 2016 edition include:
- Broader scope – it now includes companies which apply the UK Corporate Governance Code.
- It reflects changes in accounting and auditing standards.
- Additional guidance on overarching disclosure requirements that may apply.
- Additional guidance on techniques that could support the assessment process.
Overview of key points
Material uncertainties and significant judgements
- Where there are material uncertainties relating to the appropriateness of the going concern basis of accounting or significant judgements are needed, these must be disclosed. The directors' judgements and assumptions should be documented and should be consistent with other forward-looking information in the financial statements such as impairment reviews.
- Disclosures about material uncertainties and significant judgements should be company-specific. This may mean identifying the specific issue, the potential timing of the issue crystallising, its likely effects and any mitigating actions available. Disclosures should be proportionate to the company and to the nature of the issues identified.
Principal risks and uncertainties
- Where solvency or liquidity risks are identified as principal risks in the strategic report, the directors should explain the particular economic or operational conditions that give rise to those risks. The guidance sets out examples of internal and external factors and techniques, such as reverse stress tests, that companies might take into account.
- Going concern disclosures will usually be in the financial statements but directors should consider cross-referencing between different parts of the annual report in order to ensure effective communication.
Scope
This guidance is for all UK companies except small companies and micro-entities. It is relevant both to UK companies that are required to (or choose voluntarily to) apply the UK Corporate Governance Code and those that do not.
Whilst small companies and micro-entities must assess whether the going concern basis of accounting is appropriate in preparing their financial statements, the guidance has not been written with these companies in mind and some aspects do not apply to them (for example they are not required to prepare a strategic report).
More information
The full guidance is available here and the FRC's press release is here.
The FRC has also published some accompanying resources:
