AccountingWEB.co.uk guide to going concern
Steve Collings outlines how to apply the going concern concept when preparing financial statements.
The strained economic climate has thrust the issue of going concern back into the professional headlines recently and it’s a concept that practitioners and clients alike encounter difficulties applying.
Financial statements are prepared on a going concern basis when it is assumed that the company will continue to operate for the foreseeable future and there is neither the intention, nor the need, to either liquidate it or to cease trading. Directors of small companies are not relieved of their duty to assess going concern because all company accounts are required, by law, to give a true and fair view. Some directors consider a going concern review should only be undertaken by companies that fall within the scope of statutory audit – this is not the case, and directors of small companies should consider taking advice to ensure that disclosures and accounting treatment of items within the financial statements conform to the Financial Reporting Standard for Smaller Entities (FRSSE).
In October 2009, the Financial Reporting Council issued guidance ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’. This guidance applies to accounting periods ending on or after 31 December 2009, however, the guidance covers existing requirements set out in Financial Reporting Standards and FRSSE and as a consequence, earlier accounting periods will be expected to comply with the guidance.
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Going concern
I have read many articles regarding going concern. I have recently moved to a smaller practice and have found that my current employer has a different view on when it is appropriate to include a going concern note in the accounting policies section of the notes to the financial statements. This is in relation to a negative balance sheet (net liabilities). I have always been taught that if a balance sheet is negative, a going concern policy is mandatory and must state how the company is being supported (e.g. by director through stron credit on loan account, by bank through supported borrowing, by a related party with a strong balance sheet etc). None of the articles have explained whether or not this is the case. Could someone please tell me if a negative balance sheet must have a going concern policy attached within the notes and please direct me to the point of law or regulation that stipulates this.