The Financial Reporting Council (FRC) has issued updated guidance for non-listed companies on the going concern basis of accounting for directors of companies which do not apply the UK corporate governance code to reflect that small and micro entities no longer need to comply
The revised best practice guidance replaces the seven-year old going concern document and rules, issued in response to the financial crash in 2008.
The new guidance, which is not mandatory for UK companies, supersedes two documents, UK companies, Going concern and liquidity risk: guidance for directors of UK companies 2009 and, the now defunct FRSSE guidance, An update for directors of companies that adopt Financial Reporting Standard for Smaller Entities (FRSSE): going concern and financial reporting.
It brings together the requirements of company law, accounting standards, auditing standards, other regulation and existing FRC guidance and also covers reporting on solvency and liquidity risks. The guidance includes multiple examples of best practice and scenarios to help company reporters when reviewing going concern issues.
The non-mandatory guidance is designed to assist directors to make disclosures on the going concern basis of accounting and material uncertainties in their financial statements; and to disclose principal risks and uncertainties, which may include risks that might impact solvency and liquidity, within their strategic report.
Small and micro-companies are excluded from its scope 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, and nor are small companies applying Section 1A Small Entities of FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland.
The guidance covers:
- the going concern basis of accounting,
- material uncertainties,
- solvency and liquidity risk;
- periods of assessment; and
- the relevant disclosure requirements.
It includes a number of examples of best practice and of how to assess potential risks. It also emphasises that the FRC regards clear and concise reporting as paramount and when thinking about disclosures, directors are encouraged to consider the application of materiality in providing company-specific information.
Melanie McLaren, the FRC’s executive director, said: ‘The FRC encourages companies to take a broader longer-term view of the risks and uncertainties facing their business.
‘We have seen an evolution in corporate reporting in recent years. The Sharman Inquiry and the strategic report with its forward looking-orientation have been catalysts for change and it is important for our codes, standards and guidance to remain current against this backdrop.’
Companies that are required or choose voluntarily to apply the UK corporate governance code should refer to the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting here
