13 June 2012

FRC: Sharman panel publishes final report on going concern and liquidity risks

The Panel's key recommendations are that:

• the primary purpose of the going concern assessment and reporting should be to reinforce responsible behaviour in the management of going concern risks; and
• the going concern considerations made by directors and reviewed by auditors should cover both solvency and liquidity and that these should be considered over the cycle, taking an appropriately prudent view of future prospects.

and that the FRC should:

• seek to clarify and harmonise the differing definitions of going concern and related risks in accounting, auditing and governance requirements, working with the international bodies;
• review its Guidance for Directors to ensure that the going concern assessment is integrated with business planning and risk management; focuses as appropriate on both solvency and liquidity risks (including risks to the entity’s business model or capital adequacy) that could threaten the entity’s survival through the cycle; and includes stress tests of liquidity and solvency;
• integrate going concern reporting with its Effective Company Stewardship proposals, to present a fuller picture of the principal risks the entity is taking and facing in pursuit of its business model and strategy rather than only highlighting going concern risks when there are significant doubts about the entity’s survival;
• enhance the role of the auditor by seeking an explicit statement in the auditor’s report about whether the auditor has anything to add to or emphasise in relation to the narrative disclosures made by the directors about the robustness of the process of assessing going concern and its outcome.

The Panel also recommended that the FRC should take a more systematic approach to learning lessons when significant companies fail or suffer significant financial or economic distress but nonetheless survive.

The Panel also looked at whether a special going concern disclosure regime is required for banks, and concluded that this should not be necessary. However, the Panel considers it is critical to that conclusion that, in taking forward the recommendation to clarify and harmonise the differing definitions of going concern and related risks, the FRC should clarify that a conclusion that a bank is or would be reliant, in stressed circumstances, on access to liquidity support from central banks that is reasonably assured does not necessarily mean that the bank is not a going concern or that material uncertainty disclosures or an auditor’s emphasis of matter paragraph are required.

Press release

Sharman Inquiry

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