Concerned About A Going Concern? New Standards On Accounting Standards

Following on from our recent blog post on Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch), in which Mr Justice Snowdon discussed the issues around wrongful trading under section 214 of the Insolvency Act 1986 and the quantum of liability that may be placed on directors who continue to trade when they knew, or ought to have known, that the company was insolvent, the Financial Reporting Council ("FRC") has issued new guidance on the going concern basis of accounting and reporting on solvency and liquidity risks.

This new guidance, issued on 18 April 2016, replaces the FRC's 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009' and 'An Update for Directors of Companies that Adopt the Financial Reporting Standard for Smaller Entities (FRSSE): Going Concern and Financial Reporting.'

The guidance is aimed at directors of companies that do not apply, mandatorily or otherwise, the UK Corporate Governance Code and is designed to summarise important aspects of law, accounting and auditing standards, together with existing FRC guidance, relating to reporting in a company's financial statements on a going concern basis and also taking into consideration 'material' financial uncertainties, including solvency and liquidity risks, that should be disclosed.

While the need to provide a true, fair and honest view of the circumstances of a company are necessary, the FRC recognises that there are often realistic alternatives to liquidation or cessation of a business and, therefore, as a general rule, companies should file accounts on a going concern basis, except where the directors determine that, as at the date of the financial statements, the company should be placed into liquidation or cease trading, with no realistic alternatives. This is a high threshold and a rule that should not be departed from lightly.

The guidance sets out various factors that should be used to determine which disclosures are necessary to be made in the company's financial statements. These include:

Identification of risks and uncertainties, including those relating to solvency and liquidity and other potential threats to the company's ability to continue in operation...