going concern frc.org.uk

8/6/2019 Going Concern Frc.org.Uk

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FINANCIAL REPORTING COUNCIL

GOING CONCERNAND LIQUIDITY RISK:

GUIDANCEFOR DIRECTORSOF UK COMPANIES 2009


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THEPRINCIPLES

ASSESSINGGOINGCONCERN

1 Directorsshouldmakeanddocumentarigorousassessmentofwhetherthecompanyisa

goingconcernwhenpreparingannualandhalfyearlyfinancialstatements.Theprocess

carriedoutbythedirectorsshouldbeproportionateinnatureanddepthdependinguponthe

size,leveloffinancialriskandcomplexityofthecompanyanditsoperations.

THEREVIEWPERIOD

2 Directorsshouldconsiderallavailableinformationaboutthefuturewhenconcluding

whetherthecompanyisagoingconcernatthedatetheyapprovethefinancialstatements.

Theirreviewshouldusuallycoveraperiodofatleasttwelvemonthsfromthedateof

approvalofannualandhalfyearlyfinancialstatements.

DISCLOSURES

3 Directorsshouldmakebalanced,proportionateandcleardisclosuresaboutgoingconcernfor

thefinancialstatementstogiveatrueandfairview.Directorsshoulddiscloseiftheperiod

thattheyhavereviewedislessthantwelvemonthsfromthedateofapprovalofannualand

half

yearly

financial

statements

and

explain

their

justification

for

limiting

their

review

period.


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Financial Reporting Council

Contents

Page

Introduction and overview 1

One Assessing going concern 6

Two The review period 11

Three Disclosures 12

Appendices

I - Examples of going concern disclosures for small companies

II - Examples of going concern disclosures for companies other than small companies

(including for subsidiary companies of large private or listed groups)

III - Key questions for boards


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Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)


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Financial Reporting Council 1

Introduction and overview

1. ThepurposeofthisGuidanceistobringtogethertherequirementsofcompanylaw,accounting

standardsandtheListingRulesongoingconcernandliquidityriskforsmall,mediumandlargeUK

companiesandtoprovidefurtherassistanceontheirapplication.

2. ThisGuidanceappliestoaccountingperiodsendingonorafter31December2009.Itsupersedesthe

guidanceissuedin1994fordirectorsoflisted1companiesandextendstheapplicationoftheguidanceto

allsizesofcompany2forannualandhalfyearlyfinancialstatements.

3. Goingconcernisafundamentalaccountingconceptthatunderliesthepreparationoffinancial

statementsofallUKcompanies.Underthegoingconcernconceptitisassumedthatacompanywill

continueinoperationandthatthereisneithertheintentionnortheneedeithertoliquidateitortocease

trading.

4. ThisGuidanceprovidesaframeworktoassistdirectors,auditcommitteesandfinanceteamsin

determiningwhetheritisappropriatetoadoptthegoingconcernbasisforpreparingfinancial

statementsandinmakingbalanced,proportionateandcleardisclosures.Separatestandardsand

guidancehavebeenissuedbytheAuditingPracticesBoardtoaddresstheworkofauditorsinrelation

togoingconcern.

5. DirectorsofallcompaniesareencouragedtofocusontheprinciplescontainedinthisGuidanceandto

applytheminamannerproportionatetothenatureoftheirbusiness.

6. TheprinciplescontainedinthisGuidanceshouldbeappliedbydirectorsofallcompanieswhen

preparingannualandhalfyearly3financialstatements.ForcompaniesthataresubjecttotheDisclosure

andTransparencyRules(DTR)oftheFSA,ortheAIMRulesforCompanies,thisGuidanceneednotbe

appliedinthepreparationofcommunicationswhichdonotcomprisefinancialstatementssuchas

interimmanagementstatementspreparedinaccordancewithDTR4.3.

Makinganassessment

7. TheFinancialReportingStandardforSmallerEntities(FRSSE),UKGenerallyAcceptedAccounting

PracticeformediumandlargeUKcompanies(UKGAAP)andInternationalFinancialReporting

StandardsasadoptedbytheEU(IFRS)requiredirectorstosatisfythemselvesthatitisreasonablefor

themtoconcludewhetheritisappropriatetopreparefinancialstatementsonagoingconcernbasis.

1 AlistedcompanyisaUKcompanythathasanyclassofitssecuritiesadmittedtotheOfficialListmaintainedbytheFSA

inaccordancewithsection74oftheFinancialServicesandMarketsAct2000.2 TheGuidancehasbeendraftedinthecontextofcompaniesbutitmayalsobeusefultothemanagementofotherentities

thatproducefinancialstatementsthatareintendedtogiveatrueandfairview.

3 InthisGuidancetheexpressionhalfyearlyfinancialstatementsisusedtobeconsistentwiththeterminologyusedintheDTR.TheGuidancemayalsobeusefulfordirectorswhenpreparingotherinterimfinancialstatementsintendedto

giveatrueandfairview.


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2 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)

Theserequirementsarenotintendedto,anddonot,guaranteethatacompanywillremainagoing

concernuntilthenextannualorhalfyearlyfinancialstatementsareissued.

8. Wherecompaniesarefacingdifficulteconomicconditionsand/orareinfinancialdifficultythiswill

necessitate

particularly

careful

consideration

by

directors

when

making

their

assessment.

If

the

directorsconsiderthatthecompanymightnolongerbeagoingconcerntheymayneedtotakelegal

advice.

9. Smallcompaniesmaytakeadvantageofcertainconcessionsontheaccountingstandardstobeapplied

andthecontentoftheirfinancialstatements.However,directorsofsmallcompaniesarenotrelieved

fromtheobligationtoassessgoingconcernwhentheyprepareannualfinancialstatements.Theextent

oftheproceduresnecessarytomakeanassessmentforasmallcompanywillgenerallybelessthan

wouldbeappropriateforlargermorecomplexcompanies.

10.Agoingconcernassessmentinvolvesconsiderationofthefactsandcircumstancesofanindividual

company.Ifasubsidiaryofaparentcompanyhasnorealisticalternativebuttoceasetrading,thisdoes

notnecessarilymeanthattheparentcompanyshouldproduceitsfinancialstatementsonotherthana

goingconcernbasis.However,suchcircumstancesarelikelytotriggerspecificprovisionsoftheFRSSE,

UKGAAPandIFRS,suchasarequirementtoperformimpairmentreviews,andarelikelytorequire

additionaldisclosuressothatthefinancialstatementsgiveatrueandfairview.

11.Therewillbeeconomiccircumstancesthatpresentparticularchallengesforallofthepartiesinvolvedin

thepreparationofannualandhalfyearlyfinancialstatementsandfortheusersofsuchfinancial

statements.Insuchcircumstances:

directorsneedtoensurethattheypreparethoroughlyfortheirassessmentofgoingconcernand

makeappropriatedisclosures;

auditorsneedtoensurethattheyconsiderfullythegoingconcernassessmentsandreferto

goingconcernintheauditorsreportonlywhenappropriate;and

investorsandlendersneedtobepreparedtoreadandevaluatealloftherelevantinformationin

annualreportsandfinancialstatementsbeforereacting.

12.Directorsshouldplantheirassessmentofgoingconcernasearlyaspracticableincludingdecidingon

theprocesses,procedures,information,analysesandboardpapersthatwillbeneeded.Theseplans

shouldalsoaddresstheevidencetobeobtained,includingidentifyinganypotentialremedialactions

thatmayneedtobeaddressed,tosupporttheirconclusionpriortotheirapprovaloftheannualorhalf

yearlyfinancialstatements.Addressingthesechallengeswellbeforethepreparationofsuchfinancial

statementsmaymitigateproblemsarisingatthelastminutethatmightunsettleinvestorsandlenders

unnecessarily.

13.Earlydiscussionswiththecompanysauditorabouttheseplansmayhelpminimisetheriskoflast

minutesurprises.Itisalsolikelytobehelpfulifadraftoftherelevantdisclosuresaboutgoingconcern

andliquidityriskispreparedanddiscussedwiththeauditorwellbeforetheendofthereporting

period.


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14.Directorsneedtoevaluatewhichoneofthreepotentialconclusionsisappropriatetothespecific

circumstancesofthecompany.Thedirectorsmayconclude:

therearenomaterialuncertaintiesthatmaycastsignificantdoubtaboutthecompanysability

tocontinueasagoingconcern;or

there

are

material

uncertainties

related

to

events

or

conditions

that

may

cast

significant

doubt

aboutthecompanysabilitytocontinueasagoingconcernbutthegoingconcernbasisremains

appropriate;or

theuseofthegoingconcernbasisisnotappropriatei.e.thecompanyhasnorealisticalternative

buttoceasetradingorgointoliquidationorthedirectorsintendtoceasetradingorplacethe

companyintoliquidation.

15.Careshouldbetakenbythedirectorstoevaluatefullyallofthefactsandcircumstancesandtomakea

balancedassessmentofthedisclosuresthatarenecessary.Forexample,lendersmaybereluctantto

providepositiveconfirmationtothedirectorsthatfacilitieswillcontinuetobeavailable.Thisreluctance

mayextendtocompanieswithaprofitablebusinessandrelativelysmallborrowingrequirements.

Theremaybeanumberofunderstandablereasonswhyalendermaybereluctanttoconfirmthata

facilitywillbeavailableinthefutureincluding:

asamatterofpolicythelenderdoesnotprovidesuchconfirmationstoitscustomersduring

difficulteconomicconditions;

thecompanyanditslendersareengagedinnegotiationsaboutthetermsofafacility(e.g.the

interestrate).However,thereisnoevidencethatthelenderisreluctanttolendtothecompany;

and

thelenderrenewedarollingfacilityimmediatelypriortothedateoftheissuanceofthe

financialstatementsandisreluctanttogothroughtheadministrativeburdentoconfirmthe

facilitywillberenewedagaininayearstime.

16. Theabsenceofconfirmationsfromlendersdoesnotofitselfnecessarilycastsignificantdoubtuponthe

abilityofthecompanytocontinueasagoingconcernnorrequiretheauditornecessarilytoreferto

goingconcerninitsauditorsreport.

17.Marketconditionsimpactcompaniesdifferently.Itshouldnotbeassumedthatdifficultmarket

conditions,affectingmanycompanies,meanthatamaterialuncertaintyexistsaboutaspecific

companysabilitytocontinueasagoingconcern.Equally,materialuncertaintiesmayexistabouta

companysabilitytocontinueasagoingconcernintimesofrelativelybenigneconomiccircumstances.

Whatevertheeconomiccircumstances,itisimportantthatarigorousassessmentismadeand

documentedandthatfinancialstatementscontainbalanced,proportionateandcleardisclosuresof

goingconcernuncertaintiesandliquidityriskasnecessarytogiveatrueandfairview.


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Thereviewperiod

18. TheFRSSE,UKGAAPandIFRSdonotspecifyamaximumperiodthatshouldbeconsideredby

directorsaspartoftheassessmentofgoingconcern.Theextentofthereviewperiodisamatterof

judgmentbasedonfactsandcircumstances.TheFRSSEandUKGAAPprovidethatdisclosureshould

be

made

where

the

review

period

considered

by

the

directors

is

less

than

twelve

months

from

the

date

ofapprovaloftheannualfinancialstatements.DirectorsofcompaniesapplyingthisGuidancewhen

preparingIFRSannualandhalfyearlyfinancialstatementsandUKGAAPhalfyearlyfinancial

statementsshouldalsomakethisdisclosureinthosefinancialstatements.

19.ThepracticaleffectofthesedisclosurerequirementswillusuallybethatdirectorsofUKcompanieswill

adoptareviewperiodofnotlessthantwelvemonthsfromthedateofapprovalofannualandhalf

yearlyfinancialstatementsbut,inrarecases,whentheydonottheyshouldexplainwhy.

Disclosures

20.TheFRSSE,UKGAAPandIFRSrequireexplicitdisclosureofthematerialuncertaintiesthatdirectors

areawareofarisingfromtheirassessmentofgoingconcernthatmaycastsignificantdoubtonthe

companysabilitytocontinueasagoingconcern.

21.Disclosurewillalsoneedtobemadeaboutliquidityrisk,otheruncertaintiesandkeyassumptions

concerninggoingconcernnecessarytogiveatrueandfairview.Inaddition,disclosureofprincipal

risksanduncertaintieswillbeneededinthedirectorsreport4.

22.DirectorsoflistedcompaniesincorporatedintheUKarerequiredbyListingRule9.8.6R(3)toinclude

intheirannualfinancialreportastatementthatthebusinessisagoingconcern,togetherwith

supportingassumptionsorqualificationsasnecessary,thathasbeenpreparedinaccordancewiththis

Guidance5.

23. Theauditorisrequiredtomakeitsownassessmentofthedirectorsconclusionongoingconcern.Ifthe

auditorconcludesthatamaterialuncertaintyexistsrelatedtoeventsorconditionsthat,individuallyor

collectively,maycastsignificantdoubtontheentitysabilitytocontinueasagoingconcern,itis

requiredtomodifytheauditorsreport.Evenifthematerialuncertaintyisexplainedfullybythe

directorsinthefinancialstatementstheauditorisrequiredtoincludeanemphasisofmatterparagraph

initsreport.

4

This does not apply to small companies.5 TextthatisshowninblueshadingsetsoutrelevantrequirementsoftheListingRules.Theserequirementsareapplicable

onlytolistedUKcompanies.


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Summaryofeffectofthedifferentconclusions

24.Thecombinationofthefactsandcircumstancesatthedateofapprovalofthefinancialstatementswill

generallyresultinoneofthefollowingthreeconclusionsthatleadtospecificdisclosures:

Conclusion Resultingdisclosures Consequence(s)fortheauditorsreport

Nomaterialuncertainties

relatedtoeventsorconditions

thatmaycastsignificantdoubt

abouttheabilityofthecompany

tocontinueasagoingconcern

havebeenidentifiedbythe

directors.

Goingconcernispresumedinpreparing

financialstatements.Disclosurewillneedto

bemadeaboutliquidityrisk,other

uncertaintiesandkeyassumptions

concerninggoingconcernasnecessary.

Disclosureofprincipalrisksand

uncertaintieswillbeneededinthe

directorsreportsofcompaniesotherthan

small

companies.

SeeAppendixIexample1andAppendixII

examples1(a),1(b)and2.

TheListingRulesrequirethatastatement

bemadethatthebusinessisagoing

concerntogetherwithsupporting

assumptionsasnecessary.

Unmodifiedreportprovidedtheauditor

concurswiththedirectorsassessmentand

supportingdisclosures.

Materialuncertaintiesrelatedto

eventsorconditionsthatmay

castsignificantdoubtaboutthe

abilityofthecompanyto

continueasagoingconcern

havebeenidentifiedbythe

directors,butthegoingconcern

basisremainsappropriate.

Disclosuresexplainingthespecificnatureof

thematerialuncertaintiesthatmaycast

significantdoubtandexplainingwhythe

goingconcernbasishasstillbeenadopted.

Otherdisclosureswillhavetobemadeas

describedabove.

SeeAppendixIexample2andAppendixII

example3.

TheListingRulesrequirethatastatement

bemadethatthebusinessisagoing

concerntogetherwithsupporting

assumptionsorqualificationsas

necessary.

Modifiedreportincludinganemphasisof

matterparagraphhighlightingthe

existenceofmaterialuncertaintiesthat

maycastsignificantdoubtprovidedthe

auditorconcurswiththedirectors

assessmentandsupportingdisclosures.

Thegoingconcernbasisisnot

appropriateasthecompanyhas

norealisticalternativebutto

ceasetradingorgointo

liquidation,orthedirectors

intendtoceasetradingorplace

thecompanyintoliquidation.

Disclosuresexplainingthebasisofthe

conclusionandtheaccountingpolicies

appliedinpreparingthefinancial

statementsonotherthanagoingconcern

basisandanyuncertaintiesaboutthe

carryingamountsofassetsandliabilities.

Unqualifiedopinionprovidedthatthe

financialstatementscontainthenecessary

disclosuresandtheauditorconsidersthebasis

tobeappropriatetothespecificfactsand

circumstances.Theauditormayincludean

emphasisofmatterparagraph.Ifthedecision

anditsimplicationsarenotadequately

explainedtheauditormaydetermineit

necessarytomodifyitsopinion.


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One Assessing going concern

Principle1:Directorsshouldmakeanddocumentarigorousassessmentofwhetherthecompanyis

agoingconcernwhenpreparingannualandhalfyearlyfinancialstatements.Theprocesscarried

outbythedirectorsshouldbeproportionateinnatureanddepthdependinguponthesize,levelof

financialriskandcomplexityofthecompanyanditsoperations.

Guidancerelevanttoallcompanies

25.TheFRSSE,UKGAAPandIFRSrequiredirectorstomakeagoingconcernassessment.Ifthedirectors

intendtoceasetrading,orgointoliquidationortheyhavenorealisticalternativebuttodoso,theuse

ofthegoingconcernbasisofaccountingceasestobeappropriateandthisislikelytoleadtosignificant

differencesinthecarryingamountsofassetsandliabilitiesrecognisedinthefinancialstatements.

26.Theassessmentofgoingconcernismadeatthedatethatthedirectorsapprovetheannualorhalfyearly

financialstatements,andtakesintoaccounttherelevantfactsandcircumstancesatthatdate.Any

judgmentmade,whilstreasonableatthetime,canbevalidonlyatthattimeandcanbeoverturnedby

subsequentevents. Theassessmentshouldbedocumentedinsufficientdetailtoexplainthebasisofthe

directorsconclusionwithrespecttogoingconcern. TheassessmentshouldbeadoptedbytheBoard.

Smallcompanies

27.Theextentofthedirectorsreviewprocesswilldependuponthesizeandnatureofthecompanyand

thecomplexityofitsbusiness.Smallcompaniestendtobedependentuponasingleprovideroffinance,

haveonlyonebusinessactivityandalimitednumberofcreditorsincludingthetaxauthorities.Asa

resulttheextentoftheprocessandproceduresforasmallcompanyarelikelytobemuchsimplerthan

thatformediumandlargecompanies.However,itisstillimportantthattheassessmentiscarriedout

anddocumentedandaddresses,totheextentnecessary,thedirectorsplanstomanagethecompanys

borrowingrequirements,thetimingofcashflowsandthecompanysexposuretocontingentliabilities.

Subsidiarycompanies

28.Directorsofsubsidiarycompaniesofagroupneedtomaketheirowngoingconcernassessmenttaking

intoaccountthespecificfactsandcircumstancesofthesubsidiarycompanyandinparticular:

theneedforsupport6fromtheparentcompanyorfellowsubsidiaries;

theabilityandwillingnessoftheparentcompanyorfellowsubsidiariestoprovidesuchsupport;

and

theriskstothecompanysgoingconcernstatusarisingfromsupportthatithasundertakento

providetoothermembersofthegroup.

29.Thedirectorsshouldconsiderthedegreeofautonomythatthesubsidiarycompanyhasandhowthe

subsidiarysbusinessfitsintothegroupsactivitiesandfutureplans,andtheparticularbusinessrisks

thatmightarisethatcouldthreatentheappropriatenessofadoptingthegoingconcernbasisof

6 Supportforthispurposeencompassesbothfinancialandnonfinancialsupport.


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accountingforthesubsidiary.Theadequacyoftheevidenceofanyparentcompanysupportisamatter

forthejudgmentofthedirectorsofthesubsidiarycompany.Theirjudgmentusuallyincorporatestheir

experienceofdealingwiththeparentcompanyovertime,takingintoaccountrecenteventsandcurrent

circumstances.

30.Onewayofmitigatingthepotentialdifficultythatasubsidiarysdirectorsmayhavewhenconsidering

thegroupsabilitytoofferanynecessarysupport,isforthefinancialstatementsofsubsidiary

companiestobecompletedandapprovedclosetothedateofapprovaloftheparentcompanyand

groupfinancialstatements.Wherethisispracticalitavoidstheneedforthegrouptoundertakean

exercisetoreconsiderbudgetsandforecastsifthesubsidiarysfinancialstatementsarecompletedand

approvedatalaterdate.Example1(b)ofAppendixIIprovidesillustrativedisclosuresforasubsidiary

company.

Proceduresrelevanttoallcompanies

31.Directorsarebestplacedtoassesswhichfactorsarelikelytobeofgreatersignificancetotheircompany.

Thesefactorswillvarybyindustryandfromcompanytocompanywithinaparticularindustry.For

example,onecompanymayhavesignificanteconomicdependenceonaparticularcustomer,whilst

anothercompanymayhavealargenumberofcustomers.

Forecastsandbudgets

32. Forecastingandbudgetingarelongestablishedtechniquesinbusinessmanagement.Whenthecritical

assumptionsunderlyingtheforecastsandbudgetsarechallengedandsubjectedtosensitivityanalysis,

therefinedforecastsandbudgetshaveanincreasedlikelihoodofpredictingtheoutcome.

33.Directorsshouldprepareabudget,tradingestimate,cashflowforecastorotherequivalentanalysis

coveringsuchperiodastheyconsiderappropriate.

Borrowingfacilities

34.Theavailabilityofborrowingfacilitiesmaybedependentuponthecompanyscompliancewithspecific

termsandconditions(covenants).Ananalysisofborrowingdocumentationshouldbeundertakento

ensurethatallcriticaltermsandconditionsareidentifiedsothattheriskstocontinuedcompliancecan

beassessed.

35. Ifthereisuncertaintyoverthecontractualarrangementswithlendersandotherprovidersoffinance,

directorsshouldseekconfirmationfromthelendersoftheprincipaltermsandconditions.However,

theabsenceofconfirmationsdoesnotnecessarilycastsignificantdoubtupontheabilityofacompany

tocontinueasagoingconcern.

36.Theonusisonthedirectorstobesatisfiedthattherearelikelytobeappropriateandcommitted

financingarrangementsinplace.Thefacilitiesavailabletothecompanyshouldbecomparedtothe

companysexpectedcashrequirementsfromsuchfacilities,asindicatedbythecashflowforecasts,

budgetsortradingestimates.Wherenecessary,earlydiscussionofanypotentialdeficits,arrearsor

contractualbreacheswiththecompanysbankersmaypreventpotentialproblemscrystallising.


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Proceduresmorerelevanttomediumandlargecompanies

Mediumandlongtermplans

37.Directorsofmediumandlargecompaniesgenerallyassessfurtherperiodsbeyondformalbudgetsand

forecasts

by

way

of

medium

or

long

term

plans

that

give

an

indication

in

general

terms

of

how

the

directorsexpectthebusinessofthecompanytofare.

Products,servicesandmarkets

38.Directorsshouldobtaininformationaboutthemajoraspectsoftheeconomicenvironmentwithinwhich

thecompanyoperates.Theyshouldconsiderthesizeofthemarket,itsstrength,theirmarketshareand

assesswhetherthereareanyeconomic,politicalorotherfactorswhichmaycausethemarkettochange.

Thisshouldbedoneforeachofthemainproductorservicemarkets.

39.Directorsshouldassesswhethertheirproductsorservicesarecompatiblewiththeirmarketprojections

intermsofmarketposition,qualityandexpectedlife.

Timingofcashflows

40.Directorsshouldassesswhethertheirfinancialplansindicateanadequatematchingofprojectedcash

inflowswithprojectedcashoutflows.Theprojectedoutflowsshouldincludeliabilities,suchasloan

repayments,paymentoftaxliabilitiesandothercommitments.

Contingentliabilities

41.Directorsshouldconsiderthecompanysexposuretocontingentliabilities.Theseshouldinclude

sourcesofpotentialcashoutflowsduringthereviewperiodrelatingtolegalproceedings,guarantees,

marginorothercreditsupportprovisionsunderderivativecontracts,environmentalcostsandproduct

liability.

Financialandoperationalriskmanagement

42.Therearemanytypesoffinancialandoperationalrisksfacingacompanyanddirectorsshouldidentify

whichrisksaremostsignificanttotheircompany.Forexample,exposuretofixedpricecontractsandto

movementsinforeigncurrencyexchangeratesmaybethemostsignificantrisksforaconstruction

companyengagedinoverseasmarkets.Considerationshouldalsobegiventocounterpartyrisksthat

arisefromconcentrationonkeysuppliersorcustomerswhomaythemselvesbefacingfinancial

difficulty.Thedirectorsshouldconsiderhowsuchriskscouldaffectthecompanyandhowtheyare

managedinpractice.

Sensitivityanalysisandstresstesting

43. Sensitivityanalysisshouldbepreparedtoenableanunderstandingtobegainedofthecritical

assumptionsthatunderliethebudgetsandforecasts.Sensitivityanalysisinvolvesassessingtheextent

towhichtheheadroomagainstfacilitiesvarieswithchangesinassumptions.Itmay,dependingupon

thefactsandcircumstances,beappropriatetotesttheimpactofchangesofthefollowing:

interestrates;

exchangerates;


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marketshare;

rawmaterialcosts;

expectedsellingcosts;

acustomerorsupplierfailing;

availability

of

borrowings;

marginrequirementsconsequentonvaryingunderlyingpricesrelevantforderivativecontracts

duringtheirlife;

likelyextentofdamagesarisingfromunfavourablelegaljudgments;and

taxationrates.

44. Sensitivityanalysisshouldbeusedtoseektoensurethattherearenounexpected:

shortfallsinfacilitiesagainstrequirements;or

breachesofcovenantsorothertriggerswithinfundingarrangements.

45.Wheresensitivityanalysisindicatesthatthereisasignificantriskthattheheadroombetweencash

requirementsandfacilitiesavailablewillbeinsufficient,thecompanyshouldstresstestitsassumptions.

Stresstestingenablesthedirectorstoassesstheeffectofacombinationofpessimisticbutplausible

estimatesorassumptions.

Auditorsreport

46. InternationalStandardonAuditing(UKandIreland)570GoingConcernrequirestheauditorto

evaluatethedirectorsassessmentofthecompanysabilitytocontinueasagoingconcern.Iftheauditor

concludesthatamaterialuncertaintyexistswhichmaycastsignificantdoubtabouttheabilityofthe

entitytocontinueasagoingconcernitisrequiredtomodifyitsreportbyincludinganemphasisof

matterparagraphprovidedthatthecircumstancesarefullyexplainedinthefinancialstatements.

Halfyearlyfinancialstatements

47.CompanieswithsecuritiessubjecttotheDTR,admittedtotradingonAIMortradedonthePLUS

quotedmarketarerequiredtoprepareaninterimreportwhichwillincludehalfyearlyfinancial

statements.

48.Directorswillneedtoexercisejudgmentaboutthenatureandextentoftheproceduresthattheyapply

toassesstheuseofthegoingconcernassumptionatthehalfyearlydateandtheneedfordisclosures

aboutnewactivities,eventsandcircumstances.Issueswhichmighttriggeraneedtoreexaminethe

goingconcernassumptionandgoingconcernandliquidityriskdisclosuresinclude:

asignificantadversevariationinoperatingcashflowsbetweenpriorbudgetsandforecastsand

theoutturninthefirsthalfoftheyear;

asignificantreductioninrevenuesormarginsforecastforthesecondhalfofthe year;

afailuretoobtainrenewalorextensionofbankfacilitiesthathadbeenanticipated;and

afailuretosellcapitalassetsfortheirexpectedamountsorwithinpreviouslyforecast

timeframes.


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49. Ifgoingconcernhasbecomeasignificantissuesincethelastannualfinancialstatements,directors

shouldundertakeproceduressimilartothosethattheywouldhavecarriedoutforannualfinancial

statementstoensurethatallrelevantissueshavebeenidentifiedandconsidered.

50.Where

no

new

issues

have

been

identified

that

raise

questions

about

the

assessment

made

at

the

last

annualfinancialstatements,thedirectorswillneedtoundertakeprocedurestorollforwardthe

previousbudgetsandforecastsbythelengthofthehalfyearlyperiod.

Auditorshalfyearlyreviewreport

51.Theauditormaybeengagedtoreviewhalfyearlyfinancialstatements.TheAPBsInternational

StandardonReviewEngagements(UKandIreland)2410Reviewofinterimfinancialinformation

performedbytheindependentauditoroftheentityrequirestheauditor,amongotherthings,to

inquirewhetherthedirectorshavechangedtheirassessmentoftheentitysabilitytocontinueasa

goingconcern.

52.Whentheauditorbecomesawareofeventsorconditionsthatmaycastsignificantdoubtonthe

companysabilitytocontinueasagoingconcern,theauditorisrequiredtoinquireofthedirectorsasto

theirplansforfutureactions,thefeasibilityofthoseplansandwhetherthedirectorsbelievethatthe

outcomeofthoseplanswillimprovethesituation.

Questionsforboardstoconsider

53.AppendixIIIidentifieskeyquestionswhichboardsmayneedtoconsiderwhencarryingouttheirrole

inrelationtoannualandhalfyearlyfinancialstatements.


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Two The review period

Principle2:Directorsshouldconsiderallavailableinformationaboutthefuturewhenconcluding

whetherthecompanyisagoingconcernatthedatetheyapprovethefinancialstatements.Their

reviewshouldusuallycoveraperiodofatleasttwelvemonthsfromthedateofapprovalofannual

andhalfyearlyfinancialstatements.

Annualfinancialstatements

54.UnderthisGuidance,directorsofallcompaniesshouldconsiderallavailableinformationaboutthe

futureatthedateofapprovalofthefinancialstatementsincludingtheinformationobtainedfrom

budgetsandforecasts.TheFRSSE,UKGAAPandIFRSeachprovideforaminimumperiodthatshould

bereviewedbydirectorsaspartoftheirassessmentofgoingconcern.However,theextentofthereview

period

is

a

matter

of

judgment

based

on

facts

and

circumstances

and

it

may

be

appropriate

to

obtain

informationforlongerperiods.

55.Paragraph26ofIAS1Presentationoffinancialstatementsprovidesthatmanagementtakesinto

accountallavailableinformationaboutthefuture,whichisatleast,butnotlimitedto,twelvemonths

fromtheendofthereportingperiod.TheFRSSEandUKGAAPgiverisetoasimilaroutcomeby

requiringspecificdisclosurewheretheperiodreviewedbythedirectorsislessthantwelvemonths

fromthedateofapprovalofthefinancialstatements.

Auditorsreport

56. Iftheperiodofthedirectorsreviewislessthantwelvemonthsfromthedateofapprovalofthe

financialstatementsandthedirectorshavenotdisclosedthatfact,theauditorisrequiredtodosointhe

auditorsreport.


57.UnderthisGuidance,directorsofallcompaniesshouldconsiderallavailableinformationaboutthe

futureatthedateofapprovalofhalfyearlyfinancialstatementsincludingtheinformationobtained

frombudgetsandforecasts.TheAccountingStandardsBoard(ASB)hasissuedanonmandatory

statementHalfYearlyFinancialReportsforcompaniescomplyingwithUKGAAP.Thestatement

providesthattheaccountingpoliciesandpresentationshouldbeconsistentwiththoseappliedinthe

latestpublishedannualfinancialstatementsunless(a)thepoliciesandpresentationaretobechangedin

thesubsequentannualfinancialstatementsor(b)theFSAotherwiseagrees.

58.CompaniessubjecttotheDTRarerequiredtoproduceahalfyearlyfinancialreportcontainingfinancial

statements.WheresuchcompaniesuseIFRStheyarerequiredtoapplyIAS34InterimFinancial

Reporting.Itprovidesthatthesamerecognitionandmeasurementprinciplesbeappliedtohalfyearly

financialstatementsasareappliedtoannualfinancialstatements.Consequently,theminimumreview

periodrequirementinparagraph26ofIAS1appliestofinancialstatementsforahalfyearlyperiodas

describedinIAS34.WheresuchcompaniescontinuetouseUKGAAP,theDTRreferstotheASBs

statementdescribedinparagraph57.


16/31


Three Disclosures

Principle3:Directorsshouldmakebalanced,proportionateandcleardisclosuresaboutgoing

concernforthefinancialstatementstogiveatrueandfairview.Directorsshoulddiscloseifthe

periodthattheyhavereviewedislessthantwelvemonthsfromthedateofapprovalofannualand

halfyearlyfinancialstatementsandexplaintheirjustificationforlimitingtheirreviewperiod.

Allcompanies

59.Directorsofallcompaniesneedtoreachaconclusionabouttheabilityofthecompanytocontinueasa

goingconcern.Thedisclosureswhichfollowfromthedirectors conclusionwillbe:

theuseofthegoingconcernbasisofaccountingisappropriatebecausetherearenomaterial

uncertaintiesrelatedtoeventsorconditionsthatmaycastsignificantdoubtabouttheability

ofthecompanytocontinueasagoingconcern.Thedirectorsshouldusethegoingconcern

basisofaccountinginpreparingthefinancialstatementsandmakethenecessarydisclosures,

includingthoseaboutliquidityrisk,necessarytogiveatrueandfairview;or

theuseofthegoingconcernbasisisappropriatebuttherearematerialuncertaintiesrelated

toeventsorconditionsthatmaycastsignificantdoubtabouttheabilityofthecompanyto

continueasagoingconcern.Thedirectorsshouldusethegoingconcernbasisofaccountingin

preparingthefinancialstatements,disclosethematerialuncertaintiesthatmaygiveriseto

significantdoubtandmakethedisclosures,includingthoseaboutliquidityrisk,necessaryto

giveatrueandfairview;or

thegoingconcernbasisisnotappropriate.Suchaconclusionwillresultinabandoningthe

goingconcernbasisofaccountinginpreparingthefinancialstatementsandmakingdetailed

disclosuresaboutthebasisofaccountingthathasbeenused.

60.DisclosurerequirementsrelevanttothedirectorsgoingconcernassessmentaresetoutintheFRSSE,

UKGAAP,IFRS,theCompaniesAct2006(CA2006)and(forcertainlistedcompanies)theListing

Rules.Thefollowingparagraphsprovideanoverviewoftheserequirements.Paragraphs79to83

providerecommendationsastohowthesediverserequirementsmightbedrawntogetherintoasingle

placeinthecompanysfinancialstatements.

UKGAAP(includingFRSSE)

61.TheFRSSEandUKGAAPrequiredisclosurewheredirectorsidentifyamaterialuncertaintythatmay

leadtosignificantdoubtaboutgoingconcern.Thedisclosureshouldsetoutthefactsandcircumstances

inamannerthatisproportionatetothenatureofthecompany.

BusinessReviewrequiredbyCA2006tobeincludedindirectorsreportsofmediumandlarge

companies

62.TheBusinessReviewisrequiredtobeabalancedandcomprehensiveanalysisofthedevelopmentand

performanceofthecompanysbusinessduringthefinancialyearandthepositionofthecompanyatthe

endofthatyear,consistentwiththesizeandcomplexityofthebusiness.Inparticular,itmustincludea

descriptionoftheprincipalrisksanduncertaintiesfacingthecompany.


17/31


63. Inthecaseofaquotedcompany,theBusinessReviewisalsorequiredtoprovide,totheextent

necessaryforanunderstandingofthebusiness,informationonanumberofothermattersincluding:

themaintrendsandfactorslikelytoaffectthefuturedevelopment,performanceorpositionof

thecompanysbusiness;and

information

about

persons

with

whom

the

company

has

contractual

or

other

arrangements

that

areessentialtothebusinessofthecompany7.

64.DirectorsneedtoexplainintheBusinessReviewtheprincipalrisksanduncertaintiesfacingthe

companywhichshouldincludeanyparticulareconomicconditionsandfinancialdifficultiesthatthe

companyisexperiencing.OneofthepurposesoftheBusinessReviewistohelptheshareholdersassess

howthedirectorshaveperformedtheirdutytopromotethesuccessofthecompany,soitisreasonable

toexpectthatitwillalsocontainanaccountofhowthedirectorsintendtorespondtotheserisksand

uncertainties.Issueswhichmayrequiredisclosuredependuponindividualfactsandcircumstances

include:

uncertaintiesaboutcurrentfinancingarrangements(whethercommittedoruncommitted);

potentialchangesinfinancingarrangementssuchascriticalcovenantsandanyneedtoincrease

borrowinglevels;

counterpartyrisksarisingfromcurrentcreditarrangements(includingtheavailabilityof

insurancewhererelevant)witheithercustomersorsuppliers;

adependencyonkeysuppliersand/orcustomers;and

uncertaintiesposedbythepotentialimpactoftheeconomicoutlookonbusinessactivities.

Disclosureoftheexistenceofmaterialuncertaintiesthatmaycastsignificantdoubtuponthecompanys

abilitytocontinueasagoingconcern

65.TheFRSSE,FRS18AccountingpoliciesandIAS1allrequiredirectorstodisclosetheexistenceand

natureoftheuncertaintieswheretheyhaveconcludedthattherearematerialuncertaintiesthatmay

castsignificantdoubtupontheentitysabilitytocontinueasagoingconcern.

66.TheFRSSE,FRS18andIAS1donotspecifythatthisprecisephrasemustbeused.However,when

preparingtheirfinancialstatementsdirectorswillwishtobearinmindtheneedforthedisclosuresto

beclearaboutthemhavingidentifiedamaterialuncertaintythathasledtosignificantdoubtabout

goingconcern. Theywillalsowishtobearinmindtheobligationontheauditortoreportifthatlevelof

clarityhasnotbeenachievedinthewordsthathavebeenused,andmadeclearthatthecompanymay

beunabletorealiseitsassetsanddischargeitsliabilitiesinthenormalcourseofbusiness.

7 However,CA2006doesnotrequirethedisclosureofinformationaboutapersonifthedisclosurewould,intheopinion

ofthedirectors,beseriouslyprejudicialtothatpersonandcontrarytothepublicinterest.


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UKGAAP(includingtheFRSSE)

67.TheFRSSEandUKGAAPprovidethatanexplicitdisclosureshouldbemadeiftheperiodofthe

reviewforgoingconcernhasnotextendedtotwelvemonthsfromthedateofapprovalofthefinancial

statements.Suchdisclosuresshouldexplainthedirectorsjustificationfortheirdecision.

IFRS

68.Afailuretoconsideraperiodofatleasttwelvemonthsfromthebalancesheetdatewouldbecontrary

totherequirementswithinaccountingstandardsforcompaniesapplyingIFRS.Thiswouldrequire

directorstojustifythisdeparture.

Otherriskdisclosuresrequiredbyaccountingstandards

69. Inaddition,formediumandlargecompanies(andsmallcompaniesthatdonotapplytheFRSSE)a

numberofUKGAAPandIFRSstandardsrequirespecificdisclosurestobemadeaboutliquidityrisk

andotherrisksthatmayhaveabearingonagoingconcernassessmentincluding:

Liquidityrisk

70. Liquidityriskistheriskthatanentitywillencounterdifficultyinmeetingitsobligationsassociated

withfinancialliabilities.FRS29FinancialInstruments:DisclosuresandIFRS7Financial

Instruments:Disclosuresrequireacompanytomakebothqualitativeandquantitativedisclosures

concerningliquidityrisk,whereitisamaterialfinancialrisk.

71.Whereliquidityriskismaterial,FRS29andIFRS7require:

disclosureofinformationthatenablesuserstoevaluatethenatureandextentoftheentitys

exposuretoliquidityrisk;

Disclosure IFRS(2009) UKGAAP(2009/10)

Disclosuresrelatingtorisksarisingfromfinancial

instruments,includingliquidityriskwhereitis

material.

IFRS7paragraphs31

to42

FRS29paragraphs31

to42(where

adopted)

Disclosureisencouragedofundrawnborrowing

facilitiesandanyrestrictionsontheuseofthose

facilitiessuchascovenantrequirements,where

relevant.

IAS7paragraph50

(a)

Forcertain

companiesthathave

notadoptedFRS26,

FRS13paragraph40

requiresdisclosureof

thematuritiesof

materialundrawn

committed

borrowingfacilities

Disclosureofdefaultsandcovenantbreaches. IFRS7paragraphs18

and19

FRS29paragraphs18

and19(where

adopted)

Disclosureofsourcesofestimationuncertainty

aboutthecarryingamountsofassetsandliabilities.

IAS1paragraphs125

to133

FRS18paragraphs50

to55and57


19/31


narrativedisclosuresexplaininghowliquidityriskarisesinthebusinessandhowitismanaged

inpractice;

summarynumericaldataaboutliquidityriskbasedontheinformationthatisprovidedtokey

managementpersonnel,oftentheBoardofDirectors;and

certain

mandatory

disclosures

such

as

a

maturity

analysis

of

financial

liabilities.

72. ForcompaniesusingIFRS,thedisclosuresrequiredbyIFRS7aresupplementedbydisclosuresrequired

byotherIFRSstandards.Forexample,IAS7StatementofCashFlowsrequiresdisclosureofundrawn

borrowingfacilitieswhererelevanttousersunderstandingofthefinancialpositionandliquidityofthe

entityandIFRS7requiresdisclosureofdefaultsandbreachesofloantermsandconditions.

Statementongoingconcernrequiredtobemadebycertainlistedcompanies

73. ListingRule9.8.6R(3)oftheFSArequiresthatthefollowingmustbeincludedintheannual

financialreportsoflistedcompaniesincorporatedintheUnitedKingdom:

astatementmadebythedirectorsthatthebusinessisagoingconcern,togetherwithsupporting

assumptionsorqualificationsasnecessary,thathasbeenpreparedinaccordancewithGoing

ConcernandLiquidityRisk:GuidanceforDirectorsofUKCompanies2009,publishedbythe

FinancialReportingCouncil.ListingRule9.8.10R(1)requirestheauditortoreviewthedirectors

statementbeforetheannualreportispublished.

Preliminaryannouncements

74. Preliminaryannouncementsofannualresultsformoneofthefocalpointsforinvestorinterest,

primarilybecausetheyconfirmorupdatemarketexpectations.

75.UndertheListingRulessuchannouncementsarevoluntary,althoughifmadetheircontentsare

subjecttominimumrequirements.Onesuchrequirement(ListingRule9.7A.1(2))isIfalisted

companypreparesapreliminarystatementofannualresultsthestatementmustbeagreedwiththe

companysauditorpriortopublication.

76.Directorsmayneedtoconsiderwhether,inlightoftherequirementtoincludeanysignificant

additionalinformationnecessaryforthepurposeofassessingtheresultsbeingannounced(Listing

Rule9.7A.1(5))theyneedtomakeappropriatedisclosuresaboutgoingconcernintheirpreliminary

announcements.

77.TheListingRulesalsorequirespecificdisclosureinthepreliminaryannouncementofthenatureof

anylikelymodificationcontainedintheauditorsreportthatistobeincludedwiththeannual

financialreport.

78. TheFSAhascommentedinIssue20ofList!publishedinJanuary2009thatDirectorsmayneedto

considerwhether,inlightoftherequirementtoincludeanysignificantadditionalinformation

necessaryforthepurposeofassessingtheresultsbeingannounced,thereisaneedtomakeappropriate

disclosuresaboutgoingconcernintheirpreliminaryannouncements.Inaddition,theListingRules

requirespecificdisclosureinthepreliminaryannouncementofanylikelymodificationcontainedinthe


20/31


auditorsreportthatistobeincludedwiththeannualfinancialreport.Thiswould,forexample,include

anemphasisofmatterparagraphinrelationtogoingconcern.

Balanced,proportionateandcleardisclosures

79.Addressing

the

requirements

of

the

FRSSE,

UK

GAAP,

IFRS,

CA

2006

and

the

Listing

Rules

that

apply

toacompanymayleadittoaddressgoingconcernandliquidityriskindifferentsectionsofitsannual

reportandfinancialstatements.Thismaycreatedifficultiesforinvestorsandotherstakeholdersin

seekingtoobtainaclear,comprehensiveandcohesiveunderstandingoftheissuesfacingthecompany.

80. Itishelpfultoinvestorsandotherstakeholdersifallofthesedisclosuresarebroughttogetherinasingle

placeinthecompanysfinancialstatements.Itmaybenecessarytoprovideacrossreferencetothat

singleplacefromotherpartsoftheannualreport.Ifitisnotpracticabletoprovidealloftheinformation

inasingleplace,itisstillhelpfulifthekeydisclosuresarebroughttogetherbywayofanotethat

includesappropriatecrossreferencestoinformationinthefinancialstatementsandfromthefinancial

statementstoinformationincludedelsewhereintheannualreport.

81.Balanced,proportionateandcleardisclosureswouldincludethefollowingcomponents:

thekeydisclosuresorreferencesthereto;

theparticularfactorswhichthedirectorshaveconsideredinreachingaconclusionongoing

concern;and

aconcludingstatementastowhethertheuseofthegoingconcernbasisofaccountingis

appropriate,explainingthebasisofthatconclusion.

82.Cluttercausedbyexcessivedisclosureofirrelevantorimmaterialdatahasthecapacitytodetractfrom

theabilityofusersoffinancialstatementstoidentifytherelativesignificanceofissuesfacingacompany

andcouldunderminetheabilityoffinancialstatementstoprovideatrueandfairview.

83.ExamplesillustratingsuchdisclosuresandhowtheycanbebroughttogetherareincludedinAppendix

IforsmallcompaniesandinAppendixIIforothercompanies.

Auditorsreport

84.Theauditorisrequiredtoconsiderthedisclosuresaboutgoingconcernandliquidityriskmadeinthe

financialstatements.Iftheauditorconcludesthatthedisclosuresarenotadequatetomeetthe

requirementsofaccountingstandardsandCA2006,includingtheneedforfinancialstatementstogive

atrueandfairview,theauditorisrequiredtoqualifyitsopinionandtoprovideitsreasonsfordoing

so.

85.CA2006requirestheauditortoreviewtheDirectorsReportandtostateinitsreportwhetherthe

informationgivenintheDirectorsReportisconsistentwiththefinancialstatements.


86. IAS34providesthatentitiesmayelecttoprovidelessinformationathalfyearlydates,ascompared

withtheirannualfinancialstatements,intheinterestsoftimelinessandcostconsiderationsandtoavoid


21/31


repetitionofinformationpreviouslyreported.Insteadthefocusofhalfyearlyfinancialstatementsison

newactivities,eventsandcircumstanceswhichhavenotpreviouslybeenreported.

87.Directorswillneedtoexercisejudgmentindeterminingthedisclosuresaboutgoingconcernand

liquidity

risk

that

they

should

include

in

a

set

of

half

yearly

financial

statements.

Practical

experience

suggeststhatneweventsandcircumstancesarelikelytoarisequiteofteninbusinessesfacingfinancial

difficulties,forexampleasborrowingsarerenegotiatedandassetsandbusinessesaresoldorclosed.In

thesecircumstances,itislikelythathalfyearlyfinancialstatementswillincludeadditionalexplanation

aboutgoingconcernandliquidityrisk.Inothercases,ashortstatementconfirmingtheuseofthegoing

concernbasisshouldsuffice.

88.Wheretheperiodconsideredbythedirectorsinassessinggoingconcernforahalfyearlyperiodhas

beenlimitedtoaperiodoflessthantwelvemonthsfromthedateoftheapprovalofthehalfyearly

financialstatements,directorscomplyingwiththisGuidanceshoulddisclosethatfactandprovidetheir

justification.

Auditorshalfyearlyreviewreport

89.Theauditorisrequiredtoconsidertheadequacyofthedisclosuresaboutgoingconcerninthehalf

yearlyfinancialstatementsand,wherethereisamaterialuncertaintythatmaycastsignificantdoubton

theentitysabilitytocontinueasagoingconcern(andthedisclosuresmadeareadequate),toaddan

emphasisofmattertoitsreviewreport. Ifthereisamaterialuncertaintythatmaycastsignificantdoubt

abouttheabilityofthecompanytocontinueasagoingconcernwhichisnotadequatelydisclosedthe

auditorisrequiredtoexpressaqualifiedoradverseconclusion.


22/31



23/31


Appendix I Examples of going concern disclosures for small companies

ThepurposeofthisAppendixistoillustratetheguidanceinparagraph61.Inpractice,suchdisclosures

shouldbespecifictotheindividualcircumstancesofeachcompany.

Nomaterialuncertaintiesthatmaycastsignificantdoubtabouttheabilityofthecompany

tocontinueasagoingconcernhavebeenidentifiedbythedirectors

Example1AsmallcompanythathasadoptedtheFRSSEandanticipatesreducedsalesnextyear

Therehasbeenasignificantreductioninrequestsforestimatesfornewdecoratingworkandthedirectors

expectsalestoreducesignificantlynextyear.However,costsareexpectedtoreduceaccordinglyandthe

companyshouldbeabletooperatewithinitsoverdraft.Thedirectorsarenotawareofanyreasonwhythe

overdraftfacilitymightbewithdrawn.Asaresulttheyhaveadoptedthegoingconcernbasisofaccounting.

Materialuncertaintythatcastssignificantdoubtabouttheabilityofthecompanyto

continueasagoingconcernhasbeenidentifiedbythedirectors

Example2AsmallcompanythathasadoptedtheFRSSEandhasexperienceddifficultiesinsecuring

futurework

Thecompanyhasordersforworkforthenexttwomonths.However,despitesignificantefforts,ithassofar

provedimpossibletoobtainadditionalsalesorders.Ifnewordersarenotforthcoming,thedirectorswill

needtoclosethefactoryandmaketheemployeesredundant.

Thedirectorshaveconcludedthatamaterialuncertaintyexiststhatcastssignificantdoubtuponthe

companysabilitytocontinueasagoingconcernandthat,therefore,thecompanymaybeunabletorealise

itsassetsanddischargeitsliabilitiesinthenormalcourseofbusiness.However,giventhecontinuing

effortstosecureneworders,thedirectorscontinuetoadoptthegoingconcernbasisofaccounting.


24/31


Appendix II Examples of going concern disclosures for companies other thansmall companies (including for subsidiary companies of large private or listedgroups)

ThepurposeofthisAppendixistoillustratetheguidanceinparagraphs79to83inbringingtogethergoing

concernandliquidityriskdisclosures.Inpractice,suchdisclosuresshouldbespecifictotheindividual

circumstancesofeachcompany.

Nomaterialuncertaintiesthatcastsignificantdoubtabouttheabilityofthecompanyto

continueasagoingconcernhavebeenidentifiedbythedirectors

Example1(a)Acompanywithasignificantpositivebankbalance,uncomplicatedcircumstancesand

littleornoexposuretoeconomicdifficultiesthatmayimpactthegoingconcernassumption

Thecompanysbusinessactivities,togetherwiththefactorslikelytoaffectitsfuturedevelopment,

performanceandpositionaresetoutintheBusinessReviewonpagesXtoY.Thefinancialpositionofthe

company,itscashflows,liquiditypositionandborrowingfacilitiesaredescribedintheFinanceDirectors

ReviewonpagesPtoQ.Inaddition,notesADtothefinancialstatementsincludethecompanys

objectives,policiesandprocessesformanagingitscapital;itsfinancialriskmanagementobjectives;details

ofitsfinancialinstrumentsandhedgingactivities;anditsexposurestocreditriskandliquidityrisk.

Thecompanyhasconsiderablefinancialresourcestogetherwithlongtermcontractswithanumberof

customersandsuppliersacrossdifferentgeographicareasandindustries.Asaconsequence,thedirectors

believe

that

the

company

is

well

placed

to

manage

its

business

risks

successfully

despite

the

current

uncertaineconomicoutlook.

Thedirectorshaveareasonableexpectationthatthecompanyhasadequateresourcestocontinuein

operationalexistencefortheforeseeablefuture.Thustheycontinuetoadoptthegoingconcernbasisof

accountinginpreparingtheannualfinancialstatements.

Example1(b)Asignificantsubsidiarywherethesubsidiaryisfinancedbyitsparentcompanyand

participatesingroupbankingarrangements

Thecompanysbusinessactivities,togetherwiththefactorslikelytoaffectitsfuturedevelopmentand

position,aresetoutintheBusinessReviewsectionoftheDirectorsReportonpagesXtoY.

Thecompanyisexpectedtocontinuetogeneratepositivecashflowsonitsownaccountfortheforeseeable

future.Thecompanyparticipatesinthegroupscentralisedtreasuryarrangementsandsosharesbanking

arrangementswithitsparentandfellowsubsidiaries.

Thedirectors,havingassessedtheresponsesofthedirectorsofthecompanysparentABCLimitedtotheir

enquirieshavenoreasontobelievethatamaterialuncertaintyexiststhatmaycastsignificantdoubtabout

theabilityoftheABCgrouptocontinueasagoingconcernoritsabilitytocontinuewiththecurrent

bankingarrangements.


25/31


Onthebasisoftheirassessmentofthecompanysfinancialpositionandoftheenquiriesmadeofthe

directorsofABCLimited,thecompanysdirectorshaveareasonableexpectationthatthecompanywillbe

abletocontinueinoperationalexistencefortheforeseeablefuture.Thustheycontinuetoadoptthegoing

concernbasisofaccountinginpreparingtheannualfinancialstatements.

Example2Acompanywithuncomplicatedcircumstances,someexposuretoeconomicdifficultiesand

eitheracurrentmaterialbankoverdraftorloanandaneedtorenewthisfacilityintheforeseeable

futurealbeitnotimminently







AshighlightedinnoteBtothefinancialstatements,thecompanymeetsitsdaytodayworkingcapital

requirementsthroughanoverdraftfacilitythatisdueforrenewalon[date].Thecurrenteconomic

conditionscreateuncertaintyparticularlyover(a)thelevelofdemandforthecompanysproducts;(b)the

exchangeratebetweensterlingandCYandthustheconsequenceforthecostofthecompanysraw

materials;and(c)theavailabilityofbankfinanceintheforeseeablefuture.

Thecompanysforecastsandprojections,takingaccountofreasonablypossiblechangesintrading

performance,showthatthecompanyshouldbeabletooperatewithinthelevelofitscurrentfacility.The

companywillopenrenewalnegotiationswiththebankinduecourseandhas,atthisstage,notsoughtany

writtencommitmentthatthefacilitywillberenewed.However,thecompanyhashelddiscussionwithits

bankersaboutitsfutureborrowingneedsandnomattershavebeendrawntoitsattentiontosuggestthat

renewalmaynotbeforthcomingonacceptableterms.

Thedirectorshaveareasonableexpectationthatthecompanyhasadequateresourcestocontinuein

operationalexistencefortheforeseeablefuture. Thustheycontinuetoadoptthegoingconcernbasisof

accountinginpreparingtheannualfinancialstatements.


26/31


Materialuncertaintiesthatcastsignificantdoubtabouttheabilityofthecompanyto

continueasagoingconcernhavebeenidentifiedbythedirectors

Example3Acompanywithcomplicatedcircumstances,considerableexposuretoeconomicdifficulties

and

either

a

current

material

bank

overdraft

or

loan

that

requires

renewal

and

perhaps

an

increase

in

the

yearahead







AsdescribedinthedirectorsreportonpageX,thecurrenteconomicenvironmentisdifficultandthe

companyhasreportedanoperatinglossfortheyear.Thedirectorsconsiderthattheoutlookpresents

significantchallengesintermsofsalesvolumeandpricingaswellasinputcosts.Whilstthedirectorshave

institutedmeasurestopreservecashandsecureadditionalfinance,thesecircumstancescreatematerial

uncertaintiesoverfuturetradingresultsandcashflows.

AsexplainedonpageX,thedirectorsareseekingtosellapropertytoprovideadditionalworkingcapital.

Thecompanyisinnegotiationswithapotentialpurchaserbuttherecanbenocertaintythatasalewill

proceed.Basedonnegotiationsconductedtodate,thedirectorshaveareasonableexpectationthatthesale

willproceedsuccessfully,butifnotthecompanywillneedtosecureadditionalfinancefacilities.

AsexplainedintheBusinessReviewonpageY,thecompanyhascommenceddiscussionswithitsbankers

aboutanadditionalfacilitythatmayprovetobenecessaryshouldthesaleofthepropertynotproceedor

shouldmaterialadversechangesinsalesvolumesormarginsoccur.Itislikelythatthesediscussionswill

notbecompletedforsometime.Thedirectorsarealsopursuingalternativesourcesoffundingincasean

additionalfacilityisnotforthcomingbuthavenotyetsecuredacommitment.

Thedirectorshaveconcludedthatthecombinationofthesecircumstancesrepresentsamaterialuncertainty

thatcastssignificantdoubtuponthecompanysabilitytocontinueasagoingconcernandthat,therefore,

thecompanymaybeunabletorealiseitsassetsanddischargeitsliabilitiesinthenormalcourseofbusiness.

Nevertheless,aftermakingenquiriesandconsideringtheuncertaintiesdescribedabove,thedirectorshave

areasonableexpectationthatthecompanyhasadequateresourcestocontinueinoperationalexistencefor

theforeseeablefuture.Forthesereasons,theycontinuetoadoptthegoingconcernbasisofaccountingin

preparingtheannualfinancialstatements.


27/31


Appendix III Key questions for boards

Forlargeandmediumsizedcompanies,thisAppendixprovidesquestionsthattheboardmaywishto

consideranddiscusswithmanagementwhendeterminingtheappropriatenessofadoptingthegoing

concernbasisofaccounting.

Thequestionsarenotintendedtobeexhaustiveandneitherwillallquestionsbeappropriateforevery

company.ThisAppendixshouldbereadinconjunctionwiththeproceduresdescribedinSectionOne8.

1. FORECASTSANDBUDGETS

1.1Hasmanagementpreparedmonthlycashflowforecastsand/ormonthlybudgetscovering,asa

minimum,aperiodoftwelvemonthsfromtheexpecteddateofapprovalofthefinancialstatements?

1.2Hasmanagementdevelopedalistofassumptions(includingmacroeconomicassumptions)that

underlietheforecasts?Suchassumptionsmightinclude:

grossprofitmarginsthatarerealisticandconsistentwithpastperformance,theexistingand

anticipatedpricingstructureandorderbook;

expectedsalesmixandyield;

thepatternsofexpecteddebtorcollections(includingexplanationoftheirrelationshiptocurrent

debtorcollections);

levelsofstockholdingandworkinprogress;

workingcapitalrequirements;

paymenttermswithcreditors;

capitalassetreplacementprogrammes;

costescalationasaresultofinflation,contractualtermsorseasonalfluctuations;and

overheadlevels?

1.3 Indeterminingtheappropriatenessofthegoingconcernbasishasmanagementadequatelytakeninto

account:

thestabilityofthecostbase;

potentiallabourdifficulties;

theriskoflosingkeystaff;

risksoflosingkeysuppliersandsignificantcustomers;

theriskoflosingakeypatentorfranchise;

potentiallossesonlongtermcontracts;and

adequacyofthecompanysinsurancepolicies?

1.4Havetheforecastsbeentestedbyperformingsensitivityanalysesonthecriticalassumptions,

particularlyinrelationtodifferinglevelsofactivity?

8 SectionOneofGoingConcernandLiquidityRisk:GuidanceforDirectorsofUKCompanies2009,publishedbythe

FinancialReportingCouncil.


28/31


1.5Havelessonslearntfromcomparingpastforecastswithsubsequentactualresultsbeenappropriately

reflectedintheforecasts?

2. BORROWINGREQUIREMENTS

2.1

Are

the

covenants

on

current

borrowings

satisfied

as

at

the

balance

sheet

date?

2.2Arethereanyarrearsofinterestoncurrentborrowingsasatthebalancesheetdate?

2.3Havethemonthlyforecastcashflowpositionsbeencomparedtofacilitiesavailabletoestablishwhether

ornotthereareanyprojecteddeficits?Ifso,arethereplansinplacetocoverthem,forexampleto

renegotiatefacilitieswiththecompanysbankers?

2.4Havetheforecastsbeentestedagainstexistingcovenantstoassesswhetheranybreachesareexpected?

Ifso,arethereplansinplacetopreventthebreachesoccurring?

3 TIMINGOFCASHFLOWS

3.1.Hasmanagementanalysedallknownliabilities,commitmentsandrepaymentdatesinthefuture,

includingtheperiodbeyondtwelvemonthsfromtheexpecteddateofapprovalofthefinancial

statements?

3.2Wherethereareprojectedoutflowsthatareunmatchedbyinflows,hasmanagementconsideredhow

thefundswillberaisedandwhetherappropriatearrangementscanbeputinplacetomeetpaymentsas

theyfalldue?

4. CONTINGENTLIABILITIES

4.1Hasmanagementconsideredtheexposureofthecompanytocontingentliabilities,forexample,those

arisingthrough:

legalproceedings;

guaranteesand/orwarranties;

productliabilitynotcoveredbyinsurance;

grantsreceivedthataresubjecttoconditions;

environmentalcleanupcosts;

decommissioningcosts;

intragroupguarantees;and

retentions?

5. PRODUCTS,SERVICESANDMARKETS

5.1 Foreachofthemainproductsorservices,hasmanagementconsideredtherelativestrengthofthe

companysproductswithinthemarketandconsideredwhetherthereareanyeconomic,politicalor

otherfactorsthatmaycausethemarket,orthestrengthofthecompanysproductswithinthemarket,to

change?


29/31


5.2Hasmanagementconsideredwhethertheirmarketingstrategyislikelytosecurefuturemarketshareas

projectedinforecasts?

5.3Hasmanagementconsideredthemixofcustomersandwhetherthecompanysturnoveris

economically

dependent

on

too

small

a

number?

Has

management

evaluated

counterparty

risks

such

as

theriskoflosingthesecustomers,forexamplebyreviewingthecustomersthemselves,theiractivities

andwhetherthesearechanging?Ifthereisahighriskoflosingexistingcustomershasmanagement

consideredthelikelihoodoffindingalternativesalesmarkets?

5.4Hasmanagementconsideredtherobustnessofthecompanyssupplychainandwhetherthereareweak

linkswhichcouldadverselyaffectthecompanysabilitytodeliveritsproducts/servicesand/orincrease

coststhroughtheneedtoseekandusealternativesupplysources?

6. FINANCIALANDOPERATIONALRISKMANAGEMENT

6.1Hasmanagementssensitivityanalysisevaluatedtherisktothecompanyof:

adversemovementsininterestrates;

adversemovementsincurrencyexchangerates;and

exposuretoriskthroughmajorfixedpriceorfixedratecontracts?

7. FINANCIALADAPTABILITY

7.1Hasmanagementdevelopedanadequateplantoenableittotakeeffectiveactiontoaltertheamounts

andtimingofitscashflowssothatitcanrespondtounexpectedneedsoropportunities?

7.2 Indeterminingthefinancialadaptabilityofthecompanyhasmanagementconsideredtheabilityofthe

companyto:

disposeofassetsortopostponethereplacementofassetswithoutsignificantlyaffectingother

cashflows;

leaseassetsratherthantopurchaseoutright;

obtainnewsourcesoffinance;

reneworextendloans;

restructuredebts;

raiseadditionalsharecapital;

obtainfinancialsupportfromothergroupcompanies;and

continuebusinessbymakinglimitedreductionsinthelevelofoperationsorbymakinguseof

alternativeresources?

8. GROUPCOMPANIES

8.1 Hasthemanagementofasubsidiarycompanyperformedagoingconcernassessmentthattakes

accountofitsspecificfactsandcircumstances?Doestheirassessmentconsider:

howthesubsidiarysbusinessfitsintothegroupsactivitiesandfutureplans;

thebusinessrisksthatmightarisethatcouldthreatenthegoingconcernstatusofthesubsidiary;

and


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theextenttowhichthesubsidiaryisdependentoneitherfinancialorothersupportfromthe

parentcompanyand/orothergroupcompanies.

8.2 Hasmanagementmadeadeterminationconcerningtheabilityandwillingnessoftheparent

companyand/orothergroupcompaniestoprovidesuchsupport?

9. DOCUMENTATION

9.1 Hasthegoingconcernassessmentbeendocumentedinsufficientdetailtoexplainthebasisof

managementsconclusionwithrespecttogoingconcern?

9.2 WilltheBoardbeinvitedtoreviewandapprovethedocumentedassessmentattheBoardmeeting

atwhichitisexpectedtoapprovethefinancialstatements?


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going concern frc.org.uk

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