FRC rethinks controversial going concern proposals

FOLLOWING A BARRAGE OF CRITICISM the FRC has decided to amend some of the more controversial aspects of its plan to implement Lord Sharman’s guidance on going concern.

The accounting watchdog consulted the profession earlier this year on how best to implement Sharman’s recommendations for a more broad-based going concern assessment that includes solvency as well as liquidity risks.

Though the general principle of overhauling going concern had received widespread support, the FRC was also accused of “over-egging” its guidance, particularly that the rules would prove burdensome for SMEs and investors could be confused by the use of going concern to describe both accounting and stewardship purposes.

In response, the FRC said it will issue separate, simplified guidance for SMEs; make clearer distinctions as to the meaning of going concern and make a clearer link between the assessment of business viability risks and the broader risks assessment that forms part of a company’s normal risk management and reporting processes.

Hywel Ball, head of assurance, UK & Ireland, at Ernst & Young, said: “The distinction between preparing accounts on a going concern basis, and a company trading as a going concern was unclear. This could make it difficult to compare the disclosures of UK companies with their international peers. Complications might also arise when directors determine whether they have a high level of confidence about the foreseeable future of their business”.

Melanie McLaren [pictured], executive director for codes & standards at the FRC, said key aspects of the guidance had been confirmed by respondents during the consultation, while other issues have been ironed out.

“We have listened to all the views expressed on the details of our proposals and are now able to prepare more appropriate proposals for all businesses large and small,” said McLaren.

Further consultation documents covering SMEs, proposed changes to the corporate governance code and integrated going concern and risk management guidance are expected in the autumn.

The FRC’s change of heart was welcomed by Andrew Gambier, technical strategy manager at the ICAEW.

“The FRC has recognised that SMEs do need special consideration on going concern. It is positive that the FRC also appreciates the need for more time to implement any potential changes,” Gambier said.

“The nature of the changes that were originally proposed would have caused disruption to businesses and their auditors over a very tight timetable. As a result, many businesses were ‘spooked’ about what was going to happen next.”

Lord Sharman’s investigation into going concern was set up in 2011 to look at audit and financial reporting shortcomings in the wake the financial crisis, particularly how banks’ disclosures were given a clean bill of health by auditors before subsequently needing to be bailed out by the state.