fbpx

The Financial Reporting Council is the UK’s independent regulator responsible for promoting confidence in corporate governance and reporting.

The FRC have recently published guidance on an area they are now making it mandatory for all companies (no exemptions) to adhere to.

For any accounts period ending on or after 31 December 2009, the FRC require directors to make an assertion about the going concern of their company (the expected ability to continue trading). In order to prove this, it is required that all companies make an assessment of the future and the best way to do this is by a forecast or budget, be it the previous set of accounts adjusted for expected trends ahead, or a cashflow forecast on monies in and out.

The period of consideration must be at least 12 months from the date of approval of the accounts, and as this can be up to 9 months after the year-end, will in reality mean a 2 year forecast from the accounts year-end date.

Why? Well this is a knee-jerk reaction to Enron and other big company failures, but by making directors give an assertion that they believe the company will continue as a going concern, there is some protection available to professionals, or an assumption which can be tested. The forecasts give hard evidence which can then be checked.

In reality, most companies will find this hard to do, as you work on short contracts or one-off jobs booked in the very short term. Retail companies may be able to predict growth trends for example, but in light of a continuing recession, it would be largely guesswork. Still if you can make some sort of notes and predictions about the future of your company, you may well meet these requirements.

And what if you conclude that your company is not a going concern, or that there is some uncertainty? If you conclude the latter, a note may be added to the accounts saying something along the lines of “There is an uncertainty in the company’s ability to continue as a going concern as there have been no bookings made into the next financial period. However, the directors conclude that the company can continue to trade as many costs are proportional to work carried out, and therefore any reduction in sales will be met with a reduction in costs. There are also some cash reserves held, which could cover any short term dip in sales”.

Or in the worst case: “There is a material uncertainty in the company’s ability to trade as without any bookings for the next period, costs will not be met and the company will be forced to close.” If this is the conclusion, then the assets of the company are supposed to be immediately revalued to a “break-up basis”, which means that everything is adjusted to show the value you could get for it should a fast sale be forced. That is, you may have bought a £15k asset this year and taken 20% depreciation to the profit and loss account leaving £12k on the balance sheet, but if it will only sell on the open market for £8k now that it is used, then you would immediately post the reduction in value, making the balance sheet look worse than it already did.

The irony here is by owning up that there is some risk. You could be driving the final nail into your business’ coffin, a move that could make anyone who sees the accounts, (eg. your bank or creditors) drop you and run a mile!

The guidance from the FRC to all directors is here: