FRC’s Going Concern Guidance consultation demands industry input

As the October 28 deadline approaches, accounting firms across the UK are being urged to contribute to a critical consultation that could reshape how companies report on their financial stability. The Financial Reporting Council (FRC) launched a review of its Going Concern Guidance last week, marking a significant moment for financial reporting in the post-pandemic era.

With just over two months left to respond, the clock is ticking for the accounting industry to have its say on guidance that will impact auditors’ work and responsibilities for years to come.

The FRC’s proposed revisions to the “Guidance on the Going Concern Basis of Accounting and Related Reporting, including Solvency and Liquidity Risks” represent the first major overhaul since 2016, incorporating lessons learned from recent high-profile corporate collapses and the economic turbulence of the past few years.

“The revised Guidance brings it up to date with recent developments in corporate reporting, audit and evolving reporting practices. This consultation demonstrates the FRC’s continued efforts to support UK companies’ delivery of high-quality reporting in a critically important area, that enables them to more effectively access capital and grow their business,” said Mark Babington, FRC’s Executive Director of Regulatory Standards.

Who does it apply to?

The proposed guidance is set to apply to all UK companies except small companies and micro-entities, including those that adhere to the UK Corporate Governance Code. While non-mandatory, the guidance often becomes best practice, influencing how regulators and courts interpret companies’ duties. This makes it crucial for accounting firms to engage with the consultation and shape the future of financial reporting.

One of the key areas where the FRC is seeking input is on the expanded reporting scenarios. The new guidance proposes four reporting scenarios, up from the previous three, adding a scenario for when the going concern basis of accounting is appropriate and there are no material uncertainties, but reaching that conclusion involved significant judgement. This addition reflects the increasing complexity of the economic environment and the need for more nuanced reporting.

Another significant change is the inclusion of a revised range of factors and techniques that directors could consider when performing going concern assessments. These include sensitivity analysis, stress tests, scenario analysis, and reverse stress tests. The guidance aims to help companies navigate these techniques and determine which are most appropriate for their circumstances.

The proposed guidance also places increased emphasis on the overarching disclosure requirements in accounting standards. This includes disclosures about significant judgements and assumptions about the future and other sources of estimation uncertainty. In an era of heightened economic uncertainty, these disclosures become even more critical for users of financial statements.

For auditors, the implications of these changes could be far-reaching. The guidance includes a section on auditor’s responsibilities, which could influence how audits are conducted and the level of scrutiny applied to management’s going concern assessments. It also addresses the implications for auditor’s reports under various scenarios, including when material uncertainties exist or when significant judgement was involved in concluding that the going concern basis is appropriate.

Extension beyond compliance

The importance of this guidance extends beyond just regulatory compliance. Clear and robust going concern reporting is crucial for maintaining investor confidence and efficient capital allocation in the markets. In the current economic climate, with ongoing uncertainties related to inflation, geopolitical tensions, and the lingering effects of the pandemic, investors are more reliant than ever on transparent and forward-looking financial reporting.

Moreover, the guidance brings together requirements from various sources, including company law, accounting standards, auditing standards, listing rules, and the UK Corporate Governance Code. This consolidation aims to provide a comprehensive resource for companies and their auditors, potentially streamlining the reporting process while ensuring all relevant requirements are met.

As the consultation period progresses, accounting firms are encouraged to consider how the proposed changes might affect their clients across different sectors. Industries particularly sensitive to going concern issues, such as retail, hospitality, and certain segments of the manufacturing sector, may require special attention.

The FRC has made the full consultation document available on its website and is accepting responses through various channels. Firms are encouraged to not only submit their own responses but also to engage with professional bodies and industry groups to ensure a comprehensive and representative industry response.

With the final guidance expected to be published in early 2025, the outcomes of this consultation will shape financial reporting practices for years to come.