FRC: Guidance on the Going Concern Basis of Accounting and Related Reporting (including Solvency and Liquidity Risks) – Consultation

On 5 August 2024, the Financial Reporting Council (FRC) published an Exposure Draft for consultation which sets out its proposals for revised Guidance on the Going Concern Basis of Accounting and Related Reporting, including Solvency and Liquidity Risks (Guidance). Once finalised, the Guidance will replace the FRC’s existing guidance, issued in 2016.

Purpose and scope of Guidance

In ensuring that a business can continue over the longer term, directors need to assess the solvency and liquidity risks that a company faces. They must also assess whether the going concern basis of accounting is appropriate and the process should inform reporting that allows investors to understand a company’s exposure to and plans to navigate these risks.

The Guidance is intended to help companies in performing these assessments and in preparing high-quality and company-specific disclosures about the conclusions and how they were reached.

The Guidance brings together the requirements and provisions of company law, accounting standards, auditing standards, listing rules, the UK Corporate Governance Code (Code) and other regulation relating to reporting on the going concern basis of accounting and solvency and liquidity risks. It also reflects developments in reporting practice and changes to related accounting standards and auditing standards. 

The Guidance, which is non-mandatory, is aimed at providing guidance on the going concern basis of accounting for both companies that apply the Code and non-Code companies (other than small companies and micro-entities), along with guidance on the reporting of solvency and liquidity risks. It is intended to serve as a proportionate and practical guide for directors of all companies within its scope to assist them with the application of the requirements to: 

• assess and make disclosures related to the going concern basis of accounting and material uncertainties in their financial statements; and 
• disclose principal risks and uncertainties, which may include risks that might impact solvency and liquidity, within their strategic report.

The Guidance also: 

• encourages directors to take a broader view, over a longer term, of the risks and uncertainties that goes beyond the specific requirements in accounting standards; 
• acknowledges that companies have risk management and control processes in place that underpin the assessment and that the degree of formality of these processes depends on the size, complexity, and the particular circumstances of the company; 
• acknowledges that the amount of information disclosed should be proportionate to the uncertainties to which the company is exposed and to its financial and liquidity position; and 
• uses the term ‘going concern’ only in the context of referring to the going concern basis of accounting for the preparation of financial statements.

Key changes in Guidance 

Key changes in the Guidance from the 2016 guidance include the following: 

• it includes companies applying the Code within the scope of the Guidance;
• it provides additional guidance on overarching disclosure requirements in accounting standards, especially in situations when significant judgement was involved in the assessment of the appropriateness of the going concern basis of accounting or the conclusion that there are no material uncertainties related to that assessment; and 
• it provides additional guidance on the range of factors directors could consider when assessing the appropriateness of the going concern basis of accounting and solvency and liquidity risks, as well as on techniques that directors could use to support the assessment process.

Next steps

Comments on the Exposure Draft are requested by 28 October 2024 and the FRC expects to publish the final Guidance in early 2025. The Guidance, once finalised, will be available to use immediately. The effective dates of the requirements it relates to vary and the Guidance is intended to be used when companies apply the relevant requirements.

(FRC, Guidance on the Going Concern Basis of Accounting and Related Reporting (including Solvency and Liquidity Risks) – Exposure Draft, 05.08.2024)