In an era marked by economic uncertainty, corporate collapses, and investor scrutiny, financial transparency is not just a regulatory necessity—it’s a strategic imperative. Recognizing the evolving risks businesses face, the Financial Reporting Council (FRC) has issued its latest non-mandatory guidance on the going concern basis of accounting and related solvency and liquidity risks.

Why This Update Was Necessary

The corporate failures of the past decade—from Carillion to Thomas Cook—have repeatedly underscored the limitations of boilerplate going concern assessments in financial reports. While these companies had “clean” audit opinions just months before their collapse, it later became evident that risks had been understated or inadequately disclosed.

Several factors have made this update crucial:

1. Post-Pandemic Business Volatility – Supply chain disruptions, inflationary pressures, and geopolitical risks have amplified the need for rigorous solvency assessments.
2. Rising Investor and Regulator Expectations – Investors now demand forward-looking, scenario-based disclosures on financial stability rather than retrospective justifications.
3. Growing Scrutiny on Auditors and Directors – UK regulators have been tightening rules on corporate accountability, holding directors and auditors more accountable for financial misstatements.

In response, the FRC has integrated best practices from accounting, auditing, corporate governance, and regulatory frameworks into a single, comprehensive document.

What’s New in the Updated Guidance?

The FRC’s new guidance shifts from a compliance-based approach to a risk-based one, emphasizing judgment, transparency, and resilience.

The key enhancements include:

1. Stronger Expectations for Judgment-Based Assessments

The guidance expects boards and auditors to go beyond technical compliance and provide substantive evaluations of going concern risks. Instead of binary assessments (“yes, we are a going concern”), companies must now:

• • Articulate their risk assessment process – What internal factors and external market conditions were considered?
  • Justify assumptions made in financial forecasts – Are revenue projections realistic? What stress testing was performed?
  • Highlight mitigating actions and response plans – How will the business respond if risks materialize?

2. Enhanced Scenario and Stress Testing

For the first time, the FRC explicitly encourages reverse stress testing—a methodology that helps companies identify conditions under which they would cease to be a going concern. Instead of merely evaluating “probable” risks, this approach forces businesses to answer:

What would need to happen for our business model to fail?

This shift will significantly impact companies in high-volatility industries (e.g., retail, energy, and financial services), where liquidity crunches or interest rate hikes could quickly render firms insolvent.

3. Stronger Disclosure Expectations

The guidance takes a direct stance against boilerplate disclosures, requiring companies to customize their reporting to their specific industry and risk profile. Businesses are now expected to:

• • Provide quantitative and qualitative discussions on how risks were evaluated and mitigated
  • Link their going concern assessments to wider corporate risk disclosures
  • Explain why they believe assumptions remain valid despite uncertainties

This will create greater alignment between corporate reporting, investor expectations, and governance best practices.

4. Integration of Liquidity and Solvency Risks

Previously, companies assessed going concern as a standalone issue. The new guidance requires companies to view liquidity and solvency risks holistically, taking into account:

• • Debt repayment schedules
  • Access to credit facilities
  • Market volatility’s impact on financial sustainability
  • Capital allocation decisions

How can businesses adapt?

The implications of this guidance extend beyond compliance and into corporate strategy. Here’s how businesses should prepare:

1. More Rigorous Internal Risk Management

Companies must embed risk assessment and stress testing into their regular financial planning cycles. This includes:

• • Strengthening internal governance – Boards and audit committees will need to challenge management’s assumptions more rigorously.
  • Investing in financial modeling – Advanced forecasting techniques and AI-driven risk analytics will become critical.
  • Scenario planning for black swan events – Beyond routine stress tests, businesses must consider low-probability, high-impact risks.

2. Greater Investor Transparency

With investors demanding clearer disclosures on business resilience, companies should expect:

• • More probing questions from analysts and shareholders about financial stability
  • Potential credit rating impacts based on how well liquidity risks are disclosed
  • Higher reporting burdens for listed companies—particularly those with thin margins or high debt loads

KNAV Comments

The updated FRC guidance drives greater transparency and accountability in financial reporting. While non-mandatory, adopting it enhances investor confidence, governance, and financial resilience.

For businesses, this means stronger risk assessments, stress testing, and clear disclosures on liquidity and solvency. With increasing investor scrutiny, companies must justify financial projections and outline mitigation strategies to maintain credibility.

For auditors, the guidance demands deeper skepticism, requiring rigorous scrutiny of management’s assumptions, funding arrangements, and refinancing risks. Independent sensitivity analyses, post-balance sheet reviews, and proactive engagement with audit committees will be crucial.

Though not legally required, adopting these best practices strengthens investor trust, governance, and financial stability. In a volatile market, robust risk management and transparent reporting provide businesses with a competitive advantage and long-term resilience.