Going concern: IFRS® Standards compared to US GAAP

We may earn a commission when you click on a link or make a purchase through the links on our site. Regardless of its weak financial standing, the National Company is still considered a going concern. The laws that bind corporations in all countries state that a company is presumed to have an uninterrupted existence with continuing activity until such time as it is legally liquidated.

Use in risk management

Although the terminology varies slightly, both GAAPs share the same objective of informing users of the financial statements early about the company’s potential financial difficulties. Management’s going concern assessment may be significantly affected by the current economic environment. However, market conditions have changed as a result of COVID-19 – e.g. financing may be significantly more difficult and more costly to obtain now. When management becomes aware of material uncertainties related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern, those uncertainties must be disclosed in the financial statements.

1. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.
2. Unless it is known that the business will close down at a future time, all transactions are recorded in a routine manner and there is no need for any special valuation or adjustment.
3. Companies that are not a going concern may not have enough money to survive, and this fact must be publicly disclosed when an auditor audits their financial statements.
4. The business is not a going concern as, according to the available evidence, it will not be able to continue its operations for a long time in the future.

A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business. 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. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.

What is your risk tolerance?

The going concern presumption that an entity will be able to meet its obligations when they become due is foundational to financial reporting. An entity is assumed to be a going concern in the absence of significant information to the contrary. 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. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party. Unless it is categorically stated otherwise, all accounting records and income statements or balance sheets are prepared on the assumption that the business will continue to function for an indefinite future period. The going-concern value of a company is typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns.

In order for a company to be a going concern, it usually needs to be able to operate with a significant debt restructuring or massive financing overhaul. Therefore, it may be noted that companies that are not a going concern may need external financing, restructuring, asset liquidation, or be acquired by a more profitable entity. A company may not be a going concern based on the financial position on either its income statement or balance sheet. For example, a company’s annual expenses may so vastly outweigh its revenue that it can’t reasonably make a profit. On the other hand, a company may be operating at a profit buts its long-term liabilities are coming due and not enough money is being made. Going concern is not officially included in the generally accepted accounting principles (GAAP) but some instruction is included in the generally accepted auditing standards (GAAS).

Unless it is known that the business will close down at a future time, all transactions are recorded in a routine manner and there is no need for any special valuation or adjustment. 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. There are also a number of quantifiable, measurable indicators that auditors use to measure going concern.

Going Concern Concept: Definition

The liquidation value of a company will even be lower than the value of the company’s tangible assets, because the company may have to sell off its tangible assets at a discount—often, a deep discount—in order to liquidate them before ceasing operations. Examples of tangible assets that bank overdraft in balance sheet might be sold at a loss include equipment, unsold inventory, real estate, vehicles, patents, and other intellectual property (IP), furniture, and fixtures. For example, under US GAAP, the look-forward period for a company with a December 31, 20X0 balance sheet date and financial statements issued on March 31, 20X1 is the 12-month period ended March 31, 20X2. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.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.

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 how to become an independent contractor a small branch office that reassigns the employees to other departments within the company. The effects of COVID-19 are negatively affecting many companies’ financial performance and liquidity in some way. Management will need to monitor the expected impacts on operations, forecasted cash flows, and debt covenants, with the primary focus being on whether the company will have sufficient liquidity to meet its financial obligations as they fall due.

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