Going Concern Concept Extensive Look With Examples

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. 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.

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Q&As, interpretive guidance and illustrative examples include insights into how continued economic uncertainty may affect going concern assessments. This latest edition includes illustrative application of going concern’s most significant complexities. For private companies, outside investors may look to unload their shares to wash their hands of the company at any price possible, especially if there are legal problems. This will include a business valuation to attempt to value the company as a going concern and to value the assets accumulated depreciation at liquidation value. This may not actually hurt the stock price that much since auditors usually will only make a negative going concern determination when there have been problems for a while.

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. A negative judgment may also result in the breach of bank loan covenants or lead a debt rating firm to lower the rating on the company’s debt, making the cost of existing debt increase and/or preventing the company from obtaining additional debt financing.

1. If the net income is zero or negative, it may be better for a company not to report any figures at all.
2. 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).
3. 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.
4. Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets.

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. Given these circumstances, if Chemical X is the only product the company produces, the business will no longer be classified as a going concern. At this stage, it may also be necessary to take account of all legal obligations that may not have been previously brought to books. © 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. KPMG has market-leading alliances with many of the world’s leading software and services vendors.

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The calculation of goodwill takes into account the fair value of the net assets acquired less any adjustments for purchase price, encumbrances or unusual conditions that will not affect the future operations. KPMG handbooks that include discussion and analysis of significant issues for professionals in financial reporting. KPMG explains how an entity’s management performs a going concern assessment and makes appropriate disclosures.

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. If the auditor or management deems it unlikely that the business will be able to meet its obligations over the next year, the next step is evaluating the management’s plan. In xero integration with quote roller this step, the auditor must determine whether it is likely that the plan will be implemented on time and whether the plan is sufficient to save the company.

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New lenders will likely be reluctant to issue new credit, or any new credit issued will be prohibitively expensive. This credit crunch may trickle down to suppliers who may be unwilling to sell raw materials or inventory goods on credit. Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything.

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. If the plan isn’t good enough, liquidation principles must be applied to the reporting of all assets. It is then assumed that the company will not be a going concern, and the assets will be liquidated to pay off the debts. If the accountant believes that an entity may no longer be a going concern, then this brings up the issue of whether its assets are impaired, which may call for the write-down of their carrying amount to their liquidation value. Going concern is important because it is a signal of trust about the longevity and future of a company.