Going, going … concerned? How the FRC’s revised guidance can help your assessments

Going concern is a fundamental concept which has huge influence both inside and outside of the world of financial reporting. It’s caught public attention on multiple occasions in recent years following a number of high profile business failures, prompting much interest and questions asked of both accountants and auditors. Following a consultation, the FRC has recently issued a revised version of its guidance on the subject, taking into account updated working practices in the post pandemic era and recent changes to accounting and auditing standards. In this blog post, we recap why this is such a key area, summarise the changes to the guidance and look at what resources are available to help practitioners.

What is going concern and why is it so important?

In simple terms, the going concern assertion is the concept that a reporting entity will be able to continue to meet its financial obligations when due for the foreseeable future, a period usually defined as a minimum period of 12 months after the date of the signing of the auditor’s opinion. Whilst this is often considered a presumption by users of the financial statements, in practice a significant amount of work goes into assessing it by both preparers and auditors.

The impact of this assessment can be profound. Investors, lenders, suppliers, regulators, potential employees, customers; the list of stakeholders who may place reliance and make important decisions based on a set of accounts prepared under the going concern basis is lengthy. Similarly, a material uncertainty around going concern in the auditor’s report may have serious consequences. For accountants specifically, the difference between going concern and cessation basis can have a material impact on the presentation of the financial statements, often leading to a key professional judgement and potentially significant work in reclassifying or otherwise amending various accounting treatments.

What are the responsibilities of preparers and auditors?

All entities are required to report on a going concern basis unless management have reason to believe that the entity will be liquidated or otherwise cease to trade, voluntarily or otherwise. As part of the decision making process, management must carry out and document their assessment of the relevant factors and conditions which enable them to arrive at their decision to adopt, or not, the going concern basis. Auditors are required to conclude on this assessment within their report and will need to robustly challenge the assumptions and calculations upon which it is based. Given that departure from this basis is relatively unusual and the threshold for this is high, it might be tempting to see this as a ’tick box’ exercise. However, practitioners should be wary of underestimating the importance of this assessment.

In preparing their assessment, management should consider all relevant internal and external factors. Examples of these include working capital and borrowing risks, inflation and interest rate forecasts, wider industry and macroeconomic factors and operational considerations such as supply chain or other company-specific risks. A core consideration will be expected availability of cash for the coming period. Professional scepticism is a key concept here, both for preparers looking to adopt a prudent approach and auditors seeking assurance that the going concern basis is reasonable.

What does the FRC’s guidance say?

The guidance is non-mandatory but is an extremely useful source of information, providing a detailed breakdown of the key concepts behind going concern and providing a thorough list of examples of the kind of sources of information which may be relevant for completing an assessment, as well as techniques for gathering, reviewing and completing it for both preparers and auditors looking to challenge the underlying assumptions.

The guidance is updated for modern working practices, in particular taking into account more flexible ways of working and the increased use of technology in the sector to facilitate this. It is also updated to align with the latest revised versions of the accounting and auditing standards, including ISA (UK) 570, and focuses on other related areas of reporting specific to certain sectors, such as solvency and liquidity information.

In conclusion

Whether you’re preparing, reviewing or auditing accounts, it’s worth taking the time to familiarise yourself with the new guidance and consider whether there is scope to enhance your own processes with regards to going concern assessments.