Plans to increase the burden on company directors to state whether a company is a going concern could impact D&O insurers
In a move that will be followed with keen interest by directors’ and officers’ liability insurers, the UK’s financial reporting regulator has proposed changes to its guidance for directors of listed companies.
The Financial Reporting Council (FRC) has begun consultating on possible alterations to its guidance on financial reporting and the “going concern status” of companies.
Why is this guidance important? The listing rules of the FSA and the Irish Stock Exchange stipulate that the annual reports of listed companies should include a statement from the directors on the going concern status of the company. When preparing this statement, directors are “required to consider the [FRC] guidance”, which was published in 1994.
The FRC says it is time to reconsider whether the guidance is still appropriate, and whether it needs to be improved, in light of the current plight of the UK economy. With the global credit crunch – that is, the reluctance of banks to lend to one another – many organisations, particularly those that depend on the availability of loans as a key source of capital, are experiencing financial difficulties.
As the FRC points out, with market analysts forecasting a period of reduced growth or, at worst, recession, the issue of a company being a “going concern” is one that will need to be “considered in more detail by boards of directors”.
Consequently, it is not surprising to learn that the FRC’s view is that the guidance is still relevant and that it should be retained. However, it also proposes that the guidance should include extra requirements that would place a responsibility on directors to make a statement in the company report if there are any doubts that the company will remain a going concern in the future.
One of the key alterations suggested by the FRC is that directors should make a disclosure in their annual report if the period they have reviewed for the purposes of assessing the company as a going concern “does not extend to at least 12 months from the date of their approval of the financial statements”.
