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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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Financial Reporting Council 3
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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4 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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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6 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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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Financial Reporting Council 7
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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8 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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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10 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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.
Halfyearlyfinancialstatements
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.
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12 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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.
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Financial Reporting Council 13
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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14 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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
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Financial Reporting Council 15
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
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16 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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.
Halfyearlyfinancialstatements
86. IAS34providesthatentitiesmayelecttoprovidelessinformationathalfyearlydates,ascompared
withtheirannualfinancialstatements,intheinterestsoftimelinessandcostconsiderationsandtoavoid
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Financial Reporting Council 17
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.
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18 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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Financial Reporting Council 19
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.
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20 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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.
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Financial Reporting Council 21
Onthebasisoftheirassessmentofthecompanysfinancialpositionandoftheenquiriesmadeofthe
directorsofABCLimited,thecompanysdirectorshaveareasonableexpectationthatthecompanywillbe
abletocontinueinoperationalexistencefortheforeseeablefuture.Thustheycontinuetoadoptthegoing
concernbasisofaccountinginpreparingtheannualfinancialstatements.
Example2Acompanywithuncomplicatedcircumstances,someexposuretoeconomicdifficultiesand
eitheracurrentmaterialbankoverdraftorloanandaneedtorenewthisfacilityintheforeseeable
futurealbeitnotimminently
Thecompanysbusinessactivities,togetherwiththefactorslikelytoaffectitsfuturedevelopment,
performanceandpositionaresetoutintheBusinessReviewonpagesXtoY.Thefinancialpositionofthe
company,itscashflows,liquiditypositionandborrowingfacilitiesaredescribedintheFinanceDirectors
ReviewonpagesPtoQ.Inaddition,notesADtothefinancialstatementsincludethecompanys
objectives,policiesandprocessesformanagingitscapital;itsfinancialriskmanagementobjectives;details
ofitsfinancialinstrumentsandhedgingactivities;anditsexposurestocreditriskandliquidityrisk.
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.
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22 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
Materialuncertaintiesthatcastsignificantdoubtabouttheabilityofthecompanyto
continueasagoingconcernhavebeenidentifiedbythedirectors
Example3Acompanywithcomplicatedcircumstances,considerableexposuretoeconomicdifficulties
and
either
a
current
material
bank
overdraft
or
loan
that
requires
renewal
and
perhaps
an
increase
in
the
yearahead
Thecompanysbusinessactivities,togetherwiththefactorslikelytoaffectitsfuturedevelopment,
performanceandpositionaresetoutintheBusinessReviewonpagesXtoY.Thefinancialpositionofthe
company,itscashflows,liquiditypositionandborrowingfacilitiesaredescribedintheFinanceDirectors
ReviewonpagesPtoQ.Inaddition,notesADtothefinancialstatementsincludethecompanys
objectives,policiesandprocessesformanagingitscapital;itsfinancialriskmanagementobjectives;details
ofitsfinancialinstrumentsandhedgingactivities;anditsexposurestocreditriskandliquidityrisk.
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.
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Financial Reporting Council 23
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.
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24 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
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?
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Financial Reporting Council 25
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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26 Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 (October 2009)
theextenttowhichthesubsidiaryisdependentoneitherfinancialorothersupportfromthe
parentcompanyand/orothergroupcompanies.
8.2 Hasmanagementmadeadeterminationconcerningtheabilityandwillingnessoftheparent
companyand/orothergroupcompaniestoprovidesuchsupport?
9. DOCUMENTATION
9.1 Hasthegoingconcernassessmentbeendocumentedinsufficientdetailtoexplainthebasisof
managementsconclusionwithrespecttogoingconcern?
9.2 WilltheBoardbeinvitedtoreviewandapprovethedocumentedassessmentattheBoardmeeting
atwhichitisexpectedtoapprovethefinancialstatements?
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