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Changes to Directors responsibilities… September 1, 2008

Posted by businessgrowthmastery in Financial Management.
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Joanna Hughes from the FT (http://www.ft.com) wrote…

Company directors could have to disclose any “significant doubts” over whether their business truly is a going concern under plans being drawn up by the UK’s corporate reporting watchdog.

The Financial Reporting Council is proposing an overhaul of the existing guidance for directors as the effects of the credit crunch spread to the wider economy. More companies are expected to fall into financial difficulties this year.

“Going concern” is the crucial judgment made separately by both directors and auditors that a business is financially viable for 12 months from the date the annual accounts are signed off.

The FRC is amending guidance drawn up in 1994. Under the existing paper, directors can reach one of three conclusions – that they are confident the business is a going concern; that they have some doubts but are content to use “going concern”; or that the business is not viable.

The regulator is proposing adding another that would require them to disclose if they had “identified material uncertainties that may cast significant doubt about the ability of the company to continue as a going concern”.

In the current jittery environment, disclosures made under that heading could prove a severe blow to a company.

“We don’t think this is a new departure but, given it is a long time since we last had a recession, some people might have put these considerations at the back of their minds,” said Ian Wright, director of corporate reporting.

Mr Wright said the changes were designed to reflect developments in accounting rules since the mid-1990s. This year companies have faced a new rule, IFRS 7, for the first time, which requires a great deal more detailed disclosure of a company’s liquidity risks.

“It’s timely to remind everyone of additional requirements that didn’t used to be there,” said Mr Wright.

The impact on small to medium sized businesses espcially is significant – it is a pretty clear at the moment to state whether you able to proceed as a going concern, because you can apply some analytics to it. However, as soon as you create an ’emotional’ decision, all hell breaks loose – who is to say that my assessment is the sames as yours and when there is difference, who is right??