FRC moves to avert a going concern 'crisis'

The head of corporate reporting at the Financial Reporting Council has said companies do not need to have confirmation of credit lines from their banks to continue trading as a going concern.

The financial reporting watchdog last week issued guidance on when auditors and directors should issue going concern warnings that a company may not still be trading in 12 months’ time.

Ian Wright told Accountancy Age that the FRC issued the guidance partly to avoid a ‘management disaster’. As a recession looms, he said there is the risk of a stampede of companies trying to get their credit lines confirmed by banks. Failure to obtain confirmation could then see companies issue warnings over ‘material uncertainty’, questioning whether they could continue as a going concern in their financial reports.

Wright said: ‘Say you have 5,000 businesses contacting their banks at the same time, we could end up with a bit of a management disaster.

‘We’re trying to help as many companies as possible, with the support of their auditors, who might think they have to reconfirm before they can sign off their accounts. The fact that you haven’t obtained the confirmation doesn’t mean you have a material uncertainty leading to a significant doubt as to whether the business can continue as a going concern.’

The FRC guidance comes as banks face growing pressure from the government to increase their lending to businesses to help avoid more companies going bust.

Wright said that mitigating factors which could help companies avoid having to issue a going concern warning include businesses only recently securing a credit facility, or still having a reasonable amount of cash available from their existing line of credit.

‘We’re trying to avoid the situation where you’ve self-generated a crisis when you didn’t need to.’