Going Concern Concept Extensive Look With Examples

If there is an issue, the audit firm must qualify its audit report with a statement about the problem. If a company is not a going concern, the company may be revalued at the request of investors, shareholders, or the board. This revaluation may be used to price the company for acquisition or to seek out a private investor. There are often certain accounting measures that must be taken to write down the value of the company on the business’s financial reports. If a company receives a negative audit and may not be a going concern, there are several implications.

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The assumptions used in the going concern assessment should be consistent with those used in other areas of the company’s financial statements, for example impairment of assets, liquidity risk disclosures, etc. Management should continually evaluate the effects of COVID-19 on the company’s going concern assessment, including information obtained after the reporting date and up to the date the financial statements are authorized for issuance. However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets.

The terms ‘material uncertainties’ and ‘significant doubt’ are important – this standard phrasing is expected to be used in the basis of preparation note to the financial statements. Disclosures of material uncertainties that may cast doubt on a company’s ability to continue as a going concern as well as significant judgments involved in close-call scenarios may be more frequent as a result of COVID-19, given the continued economic uncertainty. Management should critically assess the disclosure requirements of IAS 1 and consider drafting required disclosure language early in the financial reporting process. 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. 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.

Companies that are not a going concern represent a significantly higher level of risk compared to other companies. Although US GAAP is more prescriptive than IFRS Standards, we do not expect significant differences in the types of events or conditions management would consider when assessing going concern under both GAAPs. 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. 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.

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1. Although US GAAP is more prescriptive than IFRS Standards, we do not expect significant differences in the types of events or conditions management would consider when assessing going concern under both GAAPs.
2. Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable.
3. In general, an auditor examines a company’s financial statements to see if it can continue as a going concern for one year following the time of an audit.
4. 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.
5. 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.

Here, it should also be noted that the assumption is not made that the business will be profitable throughout capex opex ratio its existence. © 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’s multi-disciplinary approach and deep, practical industry knowledge help clients meet challenges and respond to opportunities. Management’s assessment of going concern is in the spotlight because of COVID-19 and uncertainties involved. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Finance Strategists has an advertising relationship with some of the companies included on this website.

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IAS 1 only states that when a company has a history of profitable operations and ready access to financial resources, management may reach a conclusion on the appropriateness of the going concern assessment without detailed analysis. It follows that when this is not the case, a detailed analysis will be necessary, which likely includes robust cash flow forecasts and a review of existing and forthcoming financial obligations. Economic uncertainty has been prevalent in global markets over the last several years due to many unexpected macro events – from COVID-19 and the related supply chain disruptions to international conflicts and rising interest rates. While some companies thrive from uncertainty, others may see should you choose xero over quickbooks their financial performance, liquidity and cash flow projections negatively impacted. These vulnerabilities continue to shine a bright light on management’s responsibility for a going concern assessment.

The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.

This latest edition includes illustrative application of going concern’s most significant complexities. Going concern is an accounting term used to identify whether a company is likely to survive the next year. 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.