Discussing the FRC's consultation on Going Concern Guidance
Published: 6 August 2024
5 minute read
In our latest In Conversation podcast, Kate O'Neill, the FRC’s Director of Stakeholder Engagement and Corporate Affairs, discusses the consultation on Going Concern Guidance and why it is an important part of preparation for financial statements with Mark Babington, the FRC’s Executive Director of Regulatory Standards.
Transcript
0:10
Hi there.
0:10
Welcome to another FRC in conversation.
0:13
My name is Kate O'Neill.
0:14
I'm the Director of Stakeholder Engagement and Corporate Affairs.
0:17
And this morning I'm joined by Mark Babington, our Executive Director of Regulatory Standards.
0:22
Welcome, Mark.
0:23
Thank you, Kate.
0:24
And today, Mark, we're talking about the updated guidance that the FRC published yesterday and Monday, the 5th of August ongoing concern.
0:33
Can we just remind our listeners why going concern is such an important part of preparation of financial statements?
0:40
So the law requires companies to prepare their accounts on a going concern basis unless the directors have concluded that the company can no longer continue to run.
0:51
So virtually all of the accounts in the UK that are prepared will be prepared on a going concern basis.
0:57
That requires the directors to make an assessment.
1:00
It's forward-looking, it needs to cover an appropriate.
1:04
And it can be quite complex.
1:05
So the purpose of this guidance is to help companies meet their obligations and it's not because we've got new requirements for growing concern.
1:13
It's just timely to update such an important part and basis for the preparation of financial reports.
1:20
That's right, Kate.
1:21
This guidance, the current version is quite old now.
1:23
It was issued in 2016.
1:25
And since then there have been revisions to accounting standards by both the IASB and our own UK GAP FRS 102 that we've discussed.
1:34
Earlier this year.
1:35
We made revisions to the corporate governance code and that of course covers reporting on the going concern basis of accounts and also uncertainty and consideration of principal risks.
1:47
And I think also, Kate, we learnt a lot from the pandemic.
1:50
Actually, UK corporates were really good in the way that they addressed the threats to their business model there.
1:56
And this is an opportunity to refresh the guidance and draw on that.
2:00
I think that's such an important part, Mark, because going concerned is about what's happening now, but maybe more importantly, how the company is set up for the future.
2:08
And employees want to know whether the company is going to be around investors, suppliers, really touches all part of the stakeholder universe.
2:15
Absolutely.
2:16
If you're going to make, as you say, an investment or you're going to commit to working with an organisation, you want to know that it's got a future.
2:23
And the important thing about this guidance is it helps people meet the requirements of how to apply going concern from an accounting perspective.
2:32
That's what it seeks to do and there's a range of reporting requirements covering going concern, liquidity and risk that companies and their auditors must address depending on their size and structure.
2:43
And you already touched on that.
2:44
There are a number of bodies involved in this, but who sets the standards and who monitors these standards when looking at how companies report to make sure people are complying with them?
2:54
It's got a complex landscape, Kate.
2:56
So if you use IFRS financial statements, those are set by the IASB.
3:01
If you use UK Gap, then those requirements are set by the FRC.
3:06
Your requirement to report on principal risks and and other matters are included within company law.
3:12
So therefore that's set by government and there are also requirements within the Corporate governance code in order to support high quality reporting by companies as well.
3:22
So again, that's the value of this guidance in showing how all the moving pieces come together.
3:27
In terms of monitoring for the largest companies, the FRC monitors their annual report through the work of our corporate reporting review team.
3:36
But of course, stakeholders who use accounts and annual reports will also be reading them and asking questions.
3:42
That is part of that process of accountability and challenge.
3:46
It would be helpful, I think for listeners to remind them who does the guidance apply to?
3:50
I mean, it sounds like it's a good principle for all companies to be very clear about what they're going concerned position is, but who does this guidance apply to?
3:58
So this guidance applies really to all companies except small entities and micro entities because they have particular reporting requirements and the level of disclosure they have is significantly less than applies to other companies.
4:11
But of course, if you think about the population that use the corporate governance code, largely it's the commercial listed sector and those who might voluntarily choose to adopt that.
4:21
So there's a good number of companies of all sizes and going concern is one of those fundamental things for all of them.
4:27
Thanks.
4:28
Mark, you mentioned FRS and IFRS.
4:31
Can we just remind our listeners what the difference is between them?
4:34
I'm sure that they are lengthy documents, but I think it'd be helpful for our listeners to understand the differences or nuances.
4:40
So IFRS financial statements are required by law for group companies that are listed on a regulated Stock Exchange.
4:51
So they either have equity or debt listed on a regulated Stock Exchange anywhere in the world.
4:57
Well, from our perspective, it's those that are listed in the UK, but of course our legal requirements originally started with EU law in 2002 and that covered anything on an EU regulated exchange.
5:09
So it's not just accounts that are used in the UK, IFRS are used globally, but those requirements have been in place for a number of years.
5:17
For companies that don't use IFRS then they can choose to use UK GAP and that's FRS 102 in most cases.
5:24
And again, we set that, but it's a scaled down more proportionate form of reporting as it's not designed for the largest companies that tend to apply.
5:34
So given it's international and has some UK specific requirements, that means it's a really broad range of stakeholders as we touched on before.
5:43
And there's very reporting requirements that relate to this guidance.
5:47
So how have we at the FRC really put the proportionality lens on the development of the guidance so it doesn't feel that it's becoming burdensome or overreaching?
5:58
Well, we've sought to strip back the guidance, Kate, and focus on what are the really important messages that a company needs to communicate to comply with requirements in standards.
6:09
And we've provide guidance to help them do that and to help them carry out sometimes complicated assessments to support that reporting.
6:17
But none of the things in the guidance are mandatory.
6:19
It's there and it's intended to help and it's very much focused on saying you've got to communicate some complex messages clearly.
6:27
How can we do that in the most effective way?
6:29
And of course, it's not only companies, it's the users of financial statements who want clear and concise and accessible reporting that they can understand.
6:38
So we want to hear from all stakeholders on this consultation, Mark And it runs through to the end of October.
6:43
So I guess the team are expecting to hear from everyone affected by going concern reporting and getting a glimpse, I suppose, as to how they use it and for what purpose.
6:54
Mark Yeah, absolutely.
6:55
We want a diversity of responses from people who use the guidance to help them prepare their annual reports and accounts, from those who actually consume those annual reporting accounts to help them decide where to do their business or where to invest.
7:08
So we're open to hearing from as many people as possible from different backgrounds.
7:13
And also, if people have suggestions as to how we can make the guidance more effective, more workable, more proportionate, we want to hear from them.
7:21
Thanks, Mark.
7:22
Well, I think this is such an important basis for reporting for all stakeholders.
7:27
Going concern is kind of the beating heart of a company in its prospects.
7:31
So please do look at the guidance, look at the consultation and please give us lots of information, both from a user perspective and those people who are actually applying the guidance to the preparation of their accounts.
7:44
Thanks, Mark for your time in helping people understand why there's such a useful update to the guidance on this important going concern in preparation.
7:53
Thank you, Kate.