FRC consulting on going concern in changes to CG code

THE FRC is consulting on thorny elements of its guidance on going concern along with reforms to directors’ remuneration policy as part of wider changes to the corporate governance code following on from consultations held last year.

Last month, Accountancy Age revealed that the reporting watchdog planned to launch a new public consultation on its controversial attempts to implement Lord Sharman’s guidance on going concern following criticism from investors and a key member of original panel of inquiry.

Further changes to its going concern guidance will now be consulted on as the 2014 update to the corporate governance code and centres on elements of its recommendations – such as the strict definition of going concern – that have proved the most difficult to implement.

“The FRC does not intend to re-consult on the guidance as a whole. The overall view of respondents was that the structure, content and level of detail of the draft guidance was broadly right,” the FRC said.

Lord Sharman’s original recommendations, published in 2012, called for a more broad-based going concern assessment that takes into account solvency as well as liquidity risks, received widespread support from the profession.

Critics of the FRC’s original proposals had warned that the definition of going concern had “blurred the distinction” between the stewardship and accounting purposes of the assessment and that confusion would arise as a result.

The FRC has attempted to make a clearer distinction as to the meaning of going concern and has sought to combine previous guidance on risk management and internal control with the assessment of the going concern basis of accounting as part of changes to the UK corporate governance code.

In January however, David Pitt-Watson, a key member of the Sharman inquiry, warned that the FRC was in danger of departing from some of the panel’s original recommendations. In an email sent to investors and institutional representatives seen by Accountancy Age, Pitt-Watson urged them to take part in the consultation after the definition of going concern had drifted from its common sense meaning to one that only applies to its technical use.

In the light feedback from investors the FRC is now considering whether it would be appropriate to ask companies to make separate statements covering the narrow and broad assessments.

Other proposed changes to the code include placing greater emphasis on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee and that companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, and should consider appropriate vesting and holding periods for deferred remuneration.

In addition, companies should explain when publishing AGM results how they intend to engage with shareholders when a significant percentage of them have voted against any resolution.

Commenting on the consultation, Stephen Haddrill, chief executive of the FRC, said: “The role of the board is to ensure the sustained success of their company and exercise responsible stewardship on behalf of their shareholders. To do this effectively they need to understand and manage the risks to the future health of the company.

“The remuneration of executives on the board must also incentivise them to put the company’s well-being before their own. These proposals, which reflect the views of investors and others on earlier consultations, are intended to encourage boards to focus on the longer-term, and increase their accountability to shareholders.”

Subject to the outcome of the consultation, which closes on Friday 27 June 2014, the proposed changes will apply to financial years beginning on or after 1 October 2014.