Newsflash – New FRC Guidance on the Going Concern Basis of Accounting and Related Reporting

On 25 February the FRC published new Guidance on the Going Concern Basis of Accounting and Related Reporting (the Guidance), withdrawing the previous guidance published in 2016 and emphasising the non-mandatory nature of the new Guidance. 

The Guidance is designed for all UK companies other than small and micro entities, although the FRC acknowledges that other entities may also find it useful. It includes a summary of the existing going concern reporting requirements under financial reporting standards, company law, UK Listing Rules and the UK Corporate Governance Code. 

The FRC says: “This non-mandatory guidance serves as a proportionate and practical guide for companies within its scope to prepare high-quality, company-specific disclosures about their going concern conclusions and how they were reached. The process should allow investors to understand a company’s exposure to and plans to navigate solvency and liquidity risks.”

The FRC reiterates that the minimum 12 month period for the going concern assessment “does not mean that the outlook should be limited to 12 months.” The Guidance further explains that “a longer assessment period could be more appropriate, especially if significant events or conditions… are identified beyond that minimum period that may cast significant doubt upon the continuing use of the going concern basis of accounting. [3.17] Directors must consider all available information about the future when determining the assessment period, which includes the company’s principal risks, the company’s specific circumstances and factors relevant to the assessment. [3.18]” The Guidance calls for clear identification of the period covered by the assessment and the reason behind selecting that period.

Overall content of the Guidance

The updated Guidance is comprehensive and is intended to encourage directors to take a broader view, over a longer term, of the risks and uncertainties affecting companies. It covers:

• Understanding the scope of the Guidance and the underlying requirements and relevant disclosures
• The assessments required relating to both the going concern basis of accounting and solvency and liquidity risks
• Detailed guidance regarding the assessment process, including factors to consider and techniques that could support the process (sensitivity analysis, stress test, scenario analysis, reverse stress test)
• How materiality is applied to the reporting requirements and considerations for the placement of disclosures
• Group considerations

The FRC asks companies to take into account materiality and proportionality in all their work in this area.There is also a section included in the Guidance on auditor’s responsibilities, to assist directors with their understanding of the auditor’s role in relation to going concern and the information, evidence and analysis the auditor may need to request from the company as a result. This includes the requirements for auditors to report on the work they have performed in the annual report or to regulators.

New areas to take into account

For the first time, the FRC’s Guidance recognises four potential scenarios in respect of going concern, three under the going concern basis of accounting and one where the going concern basis is not considered appropriate. These are set out below along with the key related disclosures. The new scenario outlined is where the going concern basis of accounting is appropriate and there are no material uncertainties but reaching that conclusion involved significant judgement. This further scenario aligns with the views of the IFRS Disclosure Committee in the July 2024 IFRIC Update regarding IAS 1 reporting and with recent FRC materials.

Going concern basis of accounting:

• Going concern basis of accounting is appropriate and there are no material uncertainties
  • Disclose basis of preparation
  • FRS 102, the UK Listing Rules and the Code require an explicit statement about the adoption of the going concern basis of accounting
  • Consider overarching disclosure requirements and information necessary for a true and fair view (the Guidance explains that: “additional disclosures may be required to comply with the overarching requirements in accounting standards to disclose significant judgements, assumptions and other sources of estimation uncertainty, or for the financial statements to give a true and fair view.”)
• Going concern basis of accounting is appropriate and there are no material uncertainties but reaching that conclusion involved significant judgement (new scenario)
  • Disclose basis of preparation
  • FRS 102, the UK Listing Rules and the Code require an explicit statement about the adoption of the going concern basis of accounting
  • Disclose material uncertainties 
  • Overarching disclosure requirements apply including disclosures about significant judgements, and any assumptions or information necessary for a true and fair view

Basis other than the going concern basis of accounting:

• The going concern basis of accounting is not appropriate
  • Disclose the fact that the financial statements are not prepared on a going concern basis of accounting and the reasons why
  • Disclose basis of preparation, including the basis of accounting adopted

The report can be found here. 

This non-mandatory guidance from the FRC adds to an existing reporting framework and we will publish a Governance in brief to pull together the various regulatory requirements and highlight the challenges boards and auditors face.