FRC guidance on 'going concern' focuses on directors' roles
Directors will come under greater scrutiny as the FRC updates its guidance on the ‘going concern’ concept
Directors will come under greater scrutiny as the FRC updates its guidance on the ‘going concern’ concept
Given the current economic climate, the
Financial
Reporting Council wants to ensure its guidance on how directors
report on the ‘going concern’ principle is still robust enough to satisfy
regulators and investors. As a result, it has published a consultation paper
setting out proposals for its revision.
Currently, the Listing Rules of the
Financial Services
Authority require the annual reports of listed companies to include a
statement by the directors on the going concern status of the company. But the
regulator believes the guidance published in 1994 needs updating to keep in
line with corporate reporting requirements and best practice.
Directors at present can reach three conclusions on a going concern:
But the FRC has proposed adding a fourth, which states that “directors have
identified material uncertainties that may cast significant doubt about the
ability of the company to continue as a going concern and so need to make
additional disclosures.”
However, there are fears that more extensive disclosures could unsettle
investors. John Pierce, chief executive of business lobby group the
Quoted
Companies Alliance, says, “We’re wary about rushing on such a key
area. We are studying it to determine whether it means a change in substance or
in form. If substance, then it could have all sorts of unintended consequences
and perhaps precipitate the demise of a business that, without veiled warnings,
could pull through.”
Updating the rules
The FRC has said it does not consider the changes to be a new departure and says
they largely represent updates to accounting rules made since the guidance was
first drawn up almost 15 years ago.
But some experts have questioned the need for a fourth category in the
updated guidance. Steve Priddy, director of technical policy and research at the
Association of Chartered Certified Accountants, says it is not clear why the FRC
has developed a fourth option when “it could just use the new tougher language
and replace the middle one.”
The FRC intends to publish a summary of key comments received and its plan
for revision during December 2008 to help boards understand how the Guidance for
Directors may be amended. The consultation period ends on 24 November.
More changes
But the additional conclusion on going concern is not the only substantial
change in the consultation paper. Other changes relate to greater disclosure,
prompted by the apparent failure of many organisations particularly those in
the financial services sector to alert investors or regulators about the state
of their organisations’ finances.
The FRC’s consultation paper says that:
While the guidance is primarily intended for directors of listed companies,
the directors of AIM companies, PLUS-quoted companies, large private companies
and public interest entities may wish to adopt appropriate procedures to comply
with best practice.
Gerard Cranley, a partner at law firm
Howard
Kennedy, says the FRC is not trying to impose any further duties on
directors. “The regulator just wants more disclosure on the actions that
directors are already taking.
The credit crunch has highlighted investor concerns over the level and
timeliness of directors’ disclosures about the financial risks and exposure that
their companies are facing, particularly as banks are now less likely to lend
funds,” Cranley says. “The FRC is trying to tackle these issues, but businesses
do have some concerns about whether these changes are being made too quickly or
unnecessarily.”
Useful links
The
Consultation
Paper can be downloaded from the FRC’s website
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