Going Concern Concept Extensive Look With Examples

Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. The Eastern Company has closed a division but will continue working in its other divisions as usual. The business is a going concern because the closing down of a small portion of business does not impair the capacity of the enterprise to continue indefinitely in the future.

Once these factors have been identified, candidates should then be able to think about the procedures the auditor may adopt to establish whether the factors mean the going concern basis of accounting is appropriate in the circumstances, or not. The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two). The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS.

Use in risk management

Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations. If a company is not a going concern, that means there is risk the company may not survive the next 12 months. Management is required to disclose this fact and must provide the reasons why they may not be a going concern. Management must also identify the basis in which the financial statements are prepared and often disclose these financial reports with an audit report with a going concern opinion.

However, liquidating a company means laying off all of its employees, and if the company is viable, this can have negative ramifications not only for the laid-off workers but also for the investor who made the decision to liquidate a healthy company. Liquidating a going concern can give an investor a bad reputation among potential future takeover targets. Candidates are therefore encouraged to practise as many exam standard questions as possible as the syllabus offers a variety of ways in which the concept of going concern can be examined.

Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board determined financial statements should reveal the conditions that support an entity’s substantial doubt that it can continue as a going concern. Statements should also show management’s interpretation of the conditions and management’s future plans. An entity prepares financial statements on a going concern basis when, under the going concern assumption, the entity is viewed as continuing in business for the foreseeable future. The term ‘foreseeable future’ is not defined within ISA 570, but IAS 1®, Presentation of Financial Statements deems the foreseeable future to be a period of at least 12 months from the end of the reporting period.

What is your risk tolerance?

It’s given when an auditor has no concerns about the financial statements of a business or its ability to operate in the future. Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy. If a business is not a going concern, it means it’s gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.

Public companies

Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work. In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients. In effect, equity shareholders and other relevant parties can then make well-informed decisions on the best course of action to take with all material information on hand. Hence, the article has included all the essential information regarding the going concern going concern concept meaning concept. No single factor spells imminent doom for a business, but there are red flags that can signal trouble.

1. Receive the latest financial reporting and accounting updates with our newsletters and more delivered to your inbox.
2. The going concern assumption – i.e. the company will remain in existence indefinitely – comes with broad implications on corporate valuation, as one might reasonably expect.
3. Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets.
4. This is because it would make it impossible for the business to carry out its present contractual commitments or to use its resources according to a predetermined plan of operation.
5. In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients.

Management’s responsibility

If the company is not expected to continue operations i.e. it is required (or reasonably expected) to wind up, its financial statements are prepared using break-up basis. Going concern concept is a simple but very important financial accounting principle which stipulates the basis on which financial statements are prepared depending on the likelihood of the company continuing its normal course of business. The auditor will consider the adequacy of the disclosures made in the financial statements by management. The Material Uncertainty Related to Going Concern section will follow the Basis for Opinion paragraph and will cross-reference to the relevant disclosure in the financial statements. In accrual accounting, the financial statements are prepared under the going concern assumption, i.e. the company will remain operating into the foreseeable future, which is formally defined as the next twelve months at a bare minimum. The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt.

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That means the auditor could determine that the business you’re evaluating is likely to continue operating as a going concern even if there are substantial problems. In the first step, evaluate whether or not it is probable that the business will be able to meet all obligations during the next year. This means the business can pay all debt payments, fixed expenses, and operating expenses using its existing cash and a reasonable estimate of new cash flow during the year. Going concern is a determination that a company has sufficient assets and revenue to continue operating for the foreseeable future. Once a business goes bankrupt or otherwise liquidates, it is no longer considered a going concern. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.