March 2013: FRC proposals on going concern - Implementing the recommendations of the Sharman Panel
The FRC is proposing new Guidance on Going Concern 2013, applicable to all UK companies, with a supplement for banks. The new guidance is intended to replace their existing 2009 guidance and sets out two different purposes for going concern assessment - one for establishing whether an entity is a going concern from a stewardship point of view, and the other for determining whether the going concern assumption is appropriate for the purposes of financial reporting.
- IAS 1 or and the equivalent provisions in FRS 18, FRS 102 and the FRSSE will continue to apply. Financial statements will be prepared on a going concern basis unless there is no realistic alternative to liquidation or ceasing trading.
- New guidance will help determine whether there are material uncertainties which require disclosure.
Stewardship - narrative reporting
- Going concern will be integrated into an entity’s risk assessment process with a statement in the strategic report as to whether an entity is a going concern, having considered both solvency and liquidity risks and undertaken stress testing and liquidity analysis.
- There will be a new definition of going concern for this stewardship purpose - “a high level of confidence that [the entity] will have the necessary liquid resources to meet its liabilities as they fall due and will be able to sustain its business model,strategy and operations and remain solvent, including in the face of reasonably predictable internally or externally-generated shocks”.
For both purposes, the “foreseeable future” period over which going concern is assessed may well be longer than the current minimum twelve months from the date of approval of the financial statements. As with the 2009 guidance, this period will apply under IAS 1, notwithstanding that that standard itself says the period is twelve months from the balance sheet date.