Going Concern Assumption Accounting Concept + Examples

However, in our view, there is no general dispensation from the measurement, recognition and disclosure requirements of the Standards in this case, and these requirements are applied in a manner appropriate to the circumstances. 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. A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due.

This includes information known or reasonably knowable at the date the financial statements are issued (or available to be issued). Plummeting cash flow and ballooning debt can be obvious signs of trouble, but nonfinancial factors can also sink a business, like legal issues, changes in regulation or the resignation of a key executive. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues. It is possible for a company to mitigate an auditor’s view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed.

  1. In addition to IAS 1, IFRS 79 requires disclosure of information about the significance of financial instruments to a company, and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative terms.
  2. As mentioned earlier, it is not the auditor’s responsibility to determine whether, or not, an entity can prepare its financial statements using the going concern basis of accounting; this is the responsibility of management.
  3. Among other syllabus requirements, candidates must ensure they are aware of the respective responsibilities of auditors and management regarding going concern.
  4. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings.
  5. The « going concern » concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized.

Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products. 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. In the absence of the going concern assumption, companies would be required to recognize asset values under the implicit assumption of impending liquidation. Under the going concern principle, the company is assumed to sustain operations, so the value of its assets (and capacity for value-creation) is expected to endure into the future. Although US GAAP is more prescriptive than IFRS Standards, we would also expect under IFRS Standards that management plans are achievable and realistic, timely and sufficient to address the going concern uncertainties. There is “a lot of gray area” when judging whether a company is a going concern, said Denise Dickins, a former partner at an auditing firm who is now professor emeritus at East Carolina University and a board member at public companies.

Among other syllabus requirements, candidates must ensure they are aware of the respective responsibilities of auditors and management regarding going concern. The provisions in ISA 570, Going Concern deal with the auditor’s responsibilities in relation to management’s use of the going concern basis of accounting in the preparation of the financial statements. However, current economic and market conditions are likely very different from those of the past.

Private companies

When a company publicly uses the term “going concern,” which a lot more are doing these days, it’s almost always bad news. © 2024 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. This content outlines initial considerations meriting further consultation with life sciences https://www.wave-accounting.net/ organizations, healthcare organizations, clinicians, and legal advisors to explore feasibility and risks. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘going concern.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. A going concern is often good as it means a company is more likely than not to survive for the next year.

Under US GAAP, management’s plans are ignored under Step 1 of the going concern assessment. Their mitigating effect is considered under Step 2 to determine if they alleviate the substantial doubt raised in Step 1, but only if certain conditions are met. This means management needs to run two sets of forecasts, before and after management’s plans, whereas IFRS Standards are not prescriptive in this regard. Impacts from a fall and winter COVID-19 surge may bring further uncertainty to many companies.

What Is a Going Concern Opinion?

If the auditor determines the plan can be executed and mitigates concerns about the business, then a qualified opinion will not be issued. However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.

What is the Going Concern Assumption?

If an auditor issues a negative going concern opinion in the annual report, investors may have second thoughts about holding the stock of the company. A business valuation may be performed on the business in order to determine what it is actually worth. Before an auditor issues a going concern qualification, company leadership will be given an opportunity to create a plan to take corrective actions that can improve the outlook for the business.

This influences which products we write about and where and how the product appears on a page.

In order to avoid the entity’s credit rating suffering any further decline, the directors have refused to make disclosures in the financial statements and have prepared the financial statements for the year ended 31 March 20X2 on the going concern basis. Because the issuance of a negative going concern opinion is 5 things only tiny house living can teach you feared to be a self-fulfilling prophecy, auditors may be reluctant to issue one. A going-concern opinion may lower stockholders’ and creditors’ confidence in the company and rating agencies may downgrade the debt which leads to an inability to obtain new capital and an increase in the cost of existing capital.

Given the significant effects of COVID-19, management may need to reassess the company’s access to financing sources; they may not be easily replaced and the costs may be higher in the current circumstances. Further, other actions such as deferring capital expenditures or adjusting the workforce may be needed to generate enough cash flow to meet the company’s financial obligations. Management assesses all available information about the future for at least, but not limited to, 12 months from the reporting date.

Many candidates fall into the trap of relying on ‘discussions with management/directors’ and ‘obtaining a written representation’. Similarly ISA 580, Written Representations recognises that while written representations do provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash.

The auditor evaluates an entity’s ability to continue as a going concern for a period not less than one year following the date of the financial statements being audited (a longer period may be considered if the auditor believes such extended period to be relevant). If so, the auditor must draw attention to the uncertainty regarding the entity’s ability to continue as a going concern, in their auditor’s report. Separate standards and guidance have been issued by the Auditing Practices Board to address the work of auditors in relation to going concern.

For example, if the company expects to lose a major customer in 15 months from the reporting date, it may be necessary to extend the look-forward period up to at least March 31, 20X2. When an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business. Going concern is not included in the generally accepted accounting principles (GAAP) but is included in the generally accepted auditing standards (GAAS). In both cases a paragraph explaining the basis for the qualified or adverse opinion will be included after the opinion paragraph and the opinion paragraph will be qualified ‘except for’ or express an adverse opinion.

This article discusses these responsibilities, as well as the indicators that could highlight where an entity may not be a going concern, and the reporting aspects relating to going concern. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. 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. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.