The UK Financial Reporting Council (FRC) has issued guidance for directors dealing with the going-concern basis of accounting.
The FRC’s executive director, Melanie McLaren, 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.”
She added that directors had welcomed the move.
In addition to going concern, the guidance also covers two other matters disclosed in companies’ strategic reports, namely solvency and liquidity risks.
The companies caught by the new guidance could be using either UK GAAP or International Financial Reporting Standards (IFRS).
Both UK GAAP and IFRS have broadly similar going-concern requirements.
Major listed companies with a premium listing will continue to apply the UK corporate governance code rather than the new going-concern guidance.
Separate guidance also applies to UK-listed banks.
The FRC’s latest actions have their roots in the June 2012 recommendations of the Sharman Inquiry on going concern and liquidity risk.
Going concern is a fundamental assumption in accounting and the basis on which financial statements are prepared.
It works on the premise that a business will continue to operate in the foreseeable future without being wound up or significantly reducing its activities.
The issue has been a worry for investors in recent years given the trend for auditors to sign off on a company’s accounts as a going concern one minute only for the business to go under the next.
Among its recommendations, Sharman called for clarification of the accounting and stewardship purposes of the going-concern assessment and disclosure process and the related thresholds for such disclosures.
Second, Sharman proposed a review of the FRC’s 2009 Guidance for Directors to make sure the assessment of going concern was integrated within the business-planning and risk-management functions.
Third, Sharman wanted to see companies move away from a disclosure regime where a company’s financial statements might fail to flag up concerns about its longer-term viability.
Investors have in the past complained that the only indication they had that a company was in difficulties was when it tipped over into insolvency.
Since the release of the report, the FRC has published two consultation papers seeking views on the implementation of Sharman’s findings.
The FRC describes the guidance as “non-mandatory, best practice guidance for all companies required to make disclosures on the going-concern basis of accounting in their financial statements”.
The focus of the disclosures is on the “principal risks and uncertainties within their strategic report”.
But one leading critic of the accounting regime for UK companies said he was unconvinced the new guidance would have any tangible impact.
Tim Bush, head of governance and financial analysis at Pensions & Investment Research Consultants, told IPE: “Adopting the going-concern basis of accounting first and foremost depends on the company’s having net assets rather than a deficit.
“The flaws in the IFRS model can mask that, and this guidance does not address this. It’s wallpapering over the crack.”