Going Concern Assumption Accounting Concept + Examples

going concern meaning

Usually, liquidation value is applied when investors feel a company no longer has value as a going concern, and they want to know how much they can get by selling off the company’s tangible assets and such of its intangible assets as can be sold, such as IP. A company or investor that is acquiring a company may compare accounting services for startups that company’s going-concern value to its liquidation value in order to decide whether it’s financially worthwhile to continue operating the company, or whether it is more profitable to liquidate it. The going concern principle is the assumption that an entity will remain in business for the foreseeable future.

going concern meaning

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going concern meaning

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. 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. If a company receives a negative audit and may not be a going concern, there are several implications. Companies that are not a going concern represent a significantly higher level of risk compared to other companies.

What Happens If a Company Is Not a Going Concern?

going concern meaning

If the auditor determines the plan can be executed and mitigates concerns about the business, then a qualified opinion will not be issued. A firm’s inability to meet its obligations without https://theseattledigest.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later.

Audit and Assurance

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 included in the generally accepted accounting principles (GAAP) but is included in the generally accepted auditing standards (GAAS).

  • 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.
  • Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets.
  • Statements should also show management’s interpretation of the conditions and management’s future plans.
  • Many candidates fall into the trap of relying on ‘discussions with management/directors’ and ‘obtaining a written representation’.
  • If management conclude that the entity has no alternative but to liquidate or curtail materially the scale of its operations, the going concern basis cannot be used and the financial statements must be prepared on a different basis (such as the ‘break-up’ basis).

Going Concern Assumption

  • Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern.
  • There are situations that may arise when the auditor may request management to make an assessment, or extend their original assessment of going concern.
  • If a business is not a going concern, it means it’s gone bankrupt and its assets were liquidated.
  • 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.
  • Disclosures addressing these requirements may need to be expanded, with added focus on the company’s response to the effects of COVID-19.
  • Going concern is an example of conservatism where entities must take a less aggressive approach to financial reporting.

Consider how a single substantial lawsuit, default on a loan, or defective product can jeopardize the future of a 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. If a business https://virginiadigest.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ 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 concludes that the disclosures are inadequate, or if management have not made any disclosure at all and management refuse to remedy the situation, the opinion will be qualified or adverse.

Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything. 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 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.

going concern meaning

What is the role of a financial auditor?

  • 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.
  • Impacts from a fall and winter COVID-19 surge may bring further uncertainty to many companies.
  • This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value.
  • For example, the look-forward period for a company with a December 31, 20X0 reporting date is at least the 12 months ended December 31, 20X1, but it may need to be extended depending on the facts and circumstances.