Revised guidance for the directors of UK companies on going concern statements and liquidity risk has been published by the Financial Reporting Council. The new Guidance will apply in respect of accounting periods ending on or after 31 December 2009.
The Guidance relates to the requirement for companies to state in accounts that the business is a “going concern”. The going concern concept assumes that a company will continue in operation and that there is no intention or need to liquidate it or to cease trading. This has important implications for the valuation of the assets and liabilities of a company.
Key principles
The Guidance is formulated on the basis of the following three overriding principles, with further detail contained in the guidance notes:
- Assessing going concern: Directors should make and document a rigorous assessment of whether the company is a going concern when preparing annual and half-yearly financial statements. The process carried out by the directors should be proportionate in nature and depth depending upon the size, level of financial risk and complexity of the company and its operations.
- The review period: Directors should consider all available information about the future when concluding whether the company is a going concern at the date they approve the financial statements. Their review should usually cover a period of at least twelve months from the date of approval of annual and half-yearly financial statements.
- Disclosures: Directors should make balanced, proportionate and clear disclosures about going concern in order for the financial statements to give a true and fair view. Directors should disclose if the period that they have reviewed is less than twelve months from the date of approval of annual and half-yearly financial statements and explain their justification for limiting their review period.
Key changes from the 1994 Guidance
The Guidance now covers all UK companies in one set of principles, although specific provisions in the Guidance differentiate between smaller companies and medium and larger companies.
A further change is that the Guidance will now apply to half-yearly as well as annual financial statements for companies that are admitted to trading on a regulated market.
The Guidance can be found at http://www.frc.org.uk/press/pub2141.html.
