In Conversation: Updating the FRC's going concern guidance

Published: 25 February 2025

6 minute read

Join Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs, and Jenny Carter, Director of Accounting and Reporting Policy, as they discuss the FRC's updated going concern guidance, refreshed for the first time since 2016. Hear how this guidance, which reflects updated reporting practices and changing standards, supports proportionate, company-specific disclosures.

Transcript

**0:10**

Hi there and 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 at the FRC.

**0:18**

And today I'm joined with Jenny Carter, our Director of Accounting and Reporting Policy.

**0:23**

Welcome, Jenny.

**0:25**

OK, Jenny, you and I have done many podcasts during the In Conversation series, which is great.

**0:30**

But today we're talking about the going concern guidance that you and a team at the FRC have put together.

**0:37**

I mean, let's peel it back to why is going concern so important?

**0:42**

Yes, well going concern.

**0:44**

So all companies must make an assessment of the appropriateness of the going concern basis of accounting when they're preparing their financial statements and must prepare their accounts on that basis unless the directors determine that they're either intending to liquidate the company or cease trading or have no realistic alternative but to do so.

**1:04**

So it is a really important fundamental to the preparation of the financial statements, but also the disclosures around it are things that investors are going to be interested in.

**1:15**

I guess it's not just investors, it's suppliers, it's employees, it's people dealing with the company, maybe consumers even want to understand in a clear way.

**1:25**

Yes, the annual report in the financial statements are aimed at investors, but you're right that a range of other stakeholders will have an interest in that document.

**1:35**

And I'm sure this is the sort of information they will be looking at.

**1:38**

Oh, absolutely.

**1:39**

So we consulted on this guidance in August 2024.

**1:42**

And I mean it's such a broad topic.

**1:45**

So what was your approach to the consultation and why consult on it now?

**1:49**

Well, we've had guidance of this nature in place for many years.

**1:52**

Previous version was issued in 2016.

**1:55**

It was overdue for a refresh because we do like to look at our guidance periodically, as you know, and make sure that it remains up to date.

**2:03**

And there've been quite a lot of developments during that time.

**2:06**

Obviously, there are a number of market developments and general economic developments, but also changes in standards and other requirements.

**2:14**

So it's really timely to have a look at whether the guidance was reflecting current requirements and practice and to bring that up to date so that it continues to provide good guidance to directors in preparing their disclosures.

**2:26**

And we were aiming to get feedback from anybody who's interested in the disclosures, preparing them, reading them in terms of whether this guidance was going to help directors in preparing their annual reports.

**2:39**

I guess what you say, Jenny, I mean, not only do the circumstances of accounting standards change, but the markets, the environment in which we've all operated.

**2:47**

And during that eight years, the pandemic was a period where going concern was so particular.

**2:53**

It does sound like this is a timely update and a good time to be taking the opportunity to refresh the guidance, but the updated guidance reflected some of a number of corporate reporting developments.

**3:04**

Can you talk us through the changes we've seen in recent years that have shaped this new guidance?

**3:09**

Exactly.

**3:10**

So there have been changes to a number of the underlying requirements so that the guidance here is trying to bring together a range of different requirements and things like the UK Corporate Governance Code had been updated, there'd been changes in accounting standards and auditing standards and of course just changes in practice.

**3:28**

As you say, we've been through the pandemic and reporting practices had changed and the techniques that companies might be adopting had perhaps evolved.

**3:37**

So we wanted to reflect all of those changes in the guidance.

**3:40**

I guess when companies are thinking about using this new guidance, how should they be kind of looking at their established practices and how to apply this to going concern and solvency and liquidity risks?

**3:53**

The practices companies have will be company specific and will therefore vary and we very much want the guidance to be proportionate and practical.

**4:01**

So each company may not be doing quite the same as the next company.

**4:06**

It will depend on the circumstances that each company faces.

**4:09**

But we encourage directors to take a broader view over the longer term of the risks and uncertainties that the company is facing and to think about risk management and control processes they have in place.

**4:21**

The degree of formality of processes they might go through underpinning their assessment.

**4:27**

And I guess you made a really interesting point, Jenny, that I think we always need to emphasise in these discussions is not every company is the same.

**4:35**

And that may sound like an incredibly simple statement, but the complexity, the operational environment, the operational challenges that different companies face will reflect the way that they look at going concern.

**4:47**

I mean, you'd agree with that, right?

**4:48**

Oh, absolutely.

**4:49**

And I think both the processes companies will go through and the level of disclosure that they then have in the financial statements should be proportionate to the uncertainties to which the company is exposed, the risks, its financial and liquidity position.

**5:05**

And we would expect companies to tailor their disclosures so that they are company specific and reflecting the level of risk that there is in an individual company.

**5:15**

I mean you've talked a lot about the consultation with preparers who are obviously where the preparation of the accounts starts, but this guidance isn't just about the company's reporting.

**5:24**

How should corporates use this guidance when they're engaging with their auditors on, I mean, one of the most important issues they will be disclosing on?

**5:33**

Yes.

**5:33**

So we've got a section in the guidance that we hope directors will find useful that tries to explain some of the responsibilities of the auditors.

**5:40**

Because as you say, the auditors will need to assess the company's assessment.

**5:45**

And it tries to take the directors through some of the requirements on the auditors so they can understand perhaps the sort of questions that the auditors might be asking or the information that they might be looking for.

**5:56**

So it doesn't provide more information necessarily to the auditors, but it should help the directors in understanding some of the approaches the auditors might take and the information they might want to see.

**6:08**

Anything that helps preparers and their auditors have better conversations, have perhaps more robust conversations, can only be a good thing, right?

**6:15**

Oh, absolutely, yes.

**6:17**

And understanding some of those requirements should help the directors in those conversations.

**6:23**

But also it's important to remind our listeners that going concern isn't a reporting requirement for just the large listed companies.

**6:31**

I mean, smaller companies in some cases, maybe even more of an important disclosure for them.

**6:36**

So should smaller companies be looking or considering going concern in a different way or with a different lens?

**6:43**

So all companies need to consider the going concern basis of accounting.

**6:48**

And you're absolutely right that the risks are not necessarily varied depending on the size and there will be small companies that could have significant risks.

**6:57**

So they will need to go through that assessment and consider it appropriate to their circumstances.

**7:02**

Some of the reporting requirements are a little bit different for the smaller companies in that they're not required to prepare a strategic report for example, but they certainly need to assess the going concern basis of accounting and they will need to consider appropriate disclosures around that.

**7:17**

What we are thinking of though, because this guidance where it's trying to bring together all the requirements that might affect the larger company, we haven't necessarily drafted it with the smallest companies in mind, although they may still find it useful and we have tried to highlight that.

**7:33**

But we are thinking about doing a separate publication that pulls out for smaller companies some of the elements that are particularly relevant to them.

**7:41**

So we hope they will find that useful and we'll be publishing that in due course.

**7:46**

I guess as many of our listeners will be aware, we have a SMAA project that's just been launched.

**7:52**

And I guess issues like this for smaller companies could be woven into some of the work streams there.

**7:57**

Jenny?

**7:59**

Yes, absolutely.

**7:59**

This is about providing what we hope is helpful guidance to preparers and in this sense, providing something for the smaller entities that helps them with assessments and disclosures.

**8:10**

And of course, good quality disclosures and reporting are all important to supporting economic growth and companies providing investors with information that they can use to make decisions.

**8:21**

It's where it all begins, doesn't it? A company's prospects.

**8:24**

The strength of its financial position and how it operates is where not just investors, but all stakeholders get their best information as to their prospects and hopefully their ability to grow and thrive.

**8:37**

Jenny, what other collateral can people expect to see as a result of this going concern guidance being updated?

**8:45**

We're also going to be putting out just a short explainer that picks up on some of the key reasons why we're producing this guidance and some of the key content that it includes.

**8:54**

So hopefully that'll just be a starter for people if they're thinking is this guidance going to be helpful to me and that will give them that indication so they can go into the full guidance and read that.

**9:06**

Thank you, Jenny.

**9:06**

I mean, it sounds like it's a timely update, particularly in an environment where, as you say, finding areas that can help companies talk about their prospects, but also what they want to do as far as grow, prosper, develop and starting with a well drafted and assured set of accounts, which sets out the going concern requirements is really key to that.

**9:30**

Yes.

**9:31**

So hopefully this will contribute to helping companies with that high quality reporting, Jenny.

**9:36**

So to our listeners, please look obviously at the going concern guidance, which will be published on the website and look for that explainer that Jenny referenced as a good starting point to really get a sense of what the guidance covers and what it's hoping to achieve.

**9:50**

Thanks so much for your time this morning, Jenny.

**9:53**

Thank you.