What is Going Concern?

Going Concern is an accounting principle that assumes a business will continue to operate for the foreseeable future and will not be forced to liquidate or shut down. It implies that the company has enough resources to carry on its operations and meet its financial obligations as they become due.

Why it Matters?

The going concern assumption is the foundation for preparing financial statements. If this assumption holds true:

• Assets are recorded at cost (not liquidation value)
• Liabilities are paid in the normal course of business
• Long-term planning and depreciation schedules are valid

If a company is not considered a going concern, its financial statements must be prepared using a different approach often called the liquidation basis of accounting.

**When Going Concern is Questioned?

Auditors and management assess whether the company can continue for at least 12 months from the reporting date. Red flags that could raise doubt include:

Financial Red Flags

• Recurring losses
• Negative working capital
• Default on loans or interest payments
• Inability to raise funding

Operational Red Flags

• Loss of major clients or suppliers
• Factory shutdowns
• Labour strikes or resignations of key personnel

External Red Flags

• Industry downturns
• Regulatory changes
• Legal liabilities

Management and Auditor Responsibilities

• Management must assess going concern status and disclose any uncertainties.
• Auditors evaluate the assessment and may issue a modified audit opinion if there is substantial doubt.

Example

If a company is trying to raise emergency capital to survive and there's uncertainty about the success of that effort, the auditor may include a “going concern” warning in their report.

Disclosure Requirements

If going concern is in doubt, financial statements must disclose:

• The reasons for the doubt
• Any plans to mitigate the risk (e.g., asset sales, restructuring)
• The likelihood of those plans succeeding