Auditing and Assurance Standards and Guidance

FRC Bulletins

APB Bulletin 2009/04 Developments in corporate governance affecting the responsibilities of auditors of UK companies

Directors' statement on going concern required by the listing rules

Auditor's review of compliance

2.	The Listing Rules require the directors of certain listed companies³ to include in the annual financial report a statement that:

"the business is a going concern, together with supporting assumptions or qualification as necessary, that has been prepared in accordance with Going Concern and Liquidity Risk: Guidance for directors of UK companies 2009, published by the Financial Reporting Council in October 2009".

The FRC Guidance provides a framework to assist directors in determining whether it is appropriate to adopt the going concern basis for preparing financial statements and in making balanced, proportionate and understandable disclosures. It encourages directors to focus on the three principles set out in the FRC Guidance and to apply them in a manner proportionate to the nature of their businesses.

4.	The Listing Rules⁴ also require a listed company to ensure that the auditor reviews the directors' going concern statement prior to the publication of the annual financial report. The auditor's review responsibility with respect to the directors' going concern statement includes:

(a)

reviewing the documentation prepared by or for the directors which explains the basis of the directors' conclusion with respect to going concern. If the going concern assessment has been prepared for the directors, the FRC Guidance recommends that the directors review and approve the documented assessment at the Board meeting at which the Board approves the financial statements;

Principle 1 of the FRC Guidance

Assessing Going Concern

Directors should make and document a rigorous assessment of whether the company is a going concern when preparing annual and half-yearly financial statements. The process carried out by the directors should be proportionate in nature and depth depending upon the size, level of financial risk and complexity of the company and its operations.

(b)

evaluating the consistency of the directors' going concern statement with the auditor's knowledge obtained in the course of the audit of the financial statements. This knowledge will primarily have been obtained in meeting the requirements of International Standard on Auditing (ISA) (UK and Ireland) 570 "Going Concern"; and

Principle 2 of the FRC Guidance

The Review Period

Directors should consider all available information about the future when concluding whether the company is a going concern at the date they approve the financial statements. Their review should usually cover a period of at least twelve months from the date of approval of annual and half-yearly financial statements.

(c)

whether the directors' statement meets the disclosure requirements of the FRC Guidance.

Principle 3 of the FRC Guidance

Disclosures

Directors should make balanced, proportionate and clear disclosures about going concern for the financial statements to give a true and fair view. Directors should disclose if the period that they have reviewed is less than twelve months from the date of approval of annual and half-yearly financial statements and explain their justification for limiting their review period.

³ FSA LR 9.8.6R (3); ISE LR 6.8.3 (3). These Listing Rules apply to companies that have a primary listing of equity shares, preference shares or securities convertible into equity shares. The FSA's Listing Rule applies to such companies incorporated in the United Kingdom and the ISE's Listing Rule applies to such companies incorporated in the Republic of Ireland. From 6 April 2010, a primary listing will be described as a premium listing.

⁴ FSA LR 9.8.10R (1); ISE LR 6.8.6(1).