The Financial Reporting Council has announced plans to revise, re-consult and seek further clarification on suggested changes to its draft guidance on going concern, following wide doubt and opposition to its proposals.
Among the main concerns were those of SMEs who found the draft guidance unsuitable for their business, written with a primary focus on large corporates, with only four paragraphs specifically addressing SMEs.
Ernst & Young said it had reservations about the clarity of some of the FRC's initial proposals and how they might align with related international developments - concerns echoed during the public meeting the FRC organised to discuss its proposals.
The firm canvassed the views of non-executive directors on the FRC's draft guidance and found that almost half of the respondents expressed doubts about the foreseeable future requirement. They were also divided over whether the draft revised guidance would bring any benefits to investors and other company stakeholders.
Hywel Ball, head of assurance at E&Y said that the distinction between preparing accounts on a going concern basis, and a company trading as a going concern was unclear.
'This could make it difficult to compare the disclosures of UK companies with their international peers. Complications might also arise when directors determine whether they have a high level of confidence about the foreseeable future of their business,' said Ball.
The FRC today said that the majority of respondents supported the principles of the guidance, but that it will now take steps to issue separate simplified guidance for SMEs since respondents indicated that recommendations for SMEs could be more proportionate.
It plans to make a clearer distinction as to the meaning of going concern in the context meant by the Sharman panel since feedback suggested that the use of going concern to describe both the specific assessment required when preparing the financial statements, and the broader assessment of the risks affecting a company's viability, was confusing. The organisation will consult on whether changes to the UK Corporate Governance Code are needed to make the distinction clearer; if so, they will take effect in October 2014.
It will also make a clearer link between the assessment of business viability risks and the broader risk assessment that should form part of a company's normal risk management and reporting processes. FRC will consider this in the development of the Code and related guidance on risk management and internal control.
Melanie McLaren, executive director for Codes & Standards said: 'We believe going concern guidance information is crucial for all investors and are pleased respondents confirmed this in principle. We have listened to all the views expressed on the details of our proposals and are now able to prepare more appropriate proposals for all businesses large and small.'
The FRC expects to issue further consultation documents in the Autumn covering SMEs, proposed changes to the Code, and integrated going concern and risk management Code guidance.
