This includes information that becomes available on or before the financial statements are authorized for issuance – i.e. events or conditions requiring disclosure may arise after the reporting period. General purpose financial statements are prepared assuming that the company can and will continue its business in the foreseeable future. If the company is not expected to continue going concern example operations i.e. it is required (or reasonably expected) to wind up, its financial statements are prepared using break-up basis. The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations.
Substantial doubt is raised and is not alleviated by management’s plans (substantial doubt exists)
A small business cannot make payments to its creditors due to an extremely poor liquidity position. The court grants the purchase price of liquidating the company upon the petition of one of the firm’s creditors. The Eastern Company has closed a division but will continue working in its other divisions as usual. The business is a going concern because the closing down of a small portion of business does not impair the capacity of the enterprise to continue indefinitely in the future.
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A company or investor that is acquiring a company may compare 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. If the entity’s Financial Statements are prepared in accordance with IFRS, the standard dealing with going concerned is IAS 1. The standard requires the Financial Statements to properly disclose the basis of preparation of Financial Statements.
Step 1: Determine whether conditions and events raise substantial doubt
This article discusses these responsibilities, as well as the indicators that could highlight where an entity may not be a going concern, and the reporting aspects relating to going concern. A retail chain with consistent profits, manageable debt, and positive cash flows is considered a going concern, indicating it will operate and meet financial commitments for the foreseeable future. It allows companies to defer some of their costs over future periods, assuming they will continue to earn revenue to cover these costs.
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- 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.
- Privately, his campaign worked to tamp down concerns and keep donors and surrogates on board.
- Factors to consider include when the financial statements are authorized for issuance and whether there is any known event occurring after the minimum period of 12 months from the reporting date relevant to the analysis.
- Management typically develops plans to address going concern uncertainties – e.g. refinancing of debt, renegotiating breached covenants, and sale of assets to generate sufficient liquidity to continue to meet its obligations as they fall due.
- The assumption that a business is expected to continue in future affects the timing, nature and amount on which accounting transactions are recorded.
Disclosure of a going concern qualification
– In 2011, Gibson Guitar Factory was raided by the Federal government for illegally smuggling endangered wood into the country. The Federal government took more than $250,000 worth or Gibson’s inventory and slapped them with large fines for violating international laws. Gibson is still considered a going concern, because it is not likely the fines and punishment will stop its operations. – Assume Microsoft is currently suing a small tech company for copyright violation over its software package. Since this software package is the only operation the small tech company does, losing this lawsuit would be detrimental. The small tech company is not a going concern because it is probable they will be out of business after the lawsuit is settled.
At this stage, it may also be necessary to take account of all legal obligations that may not have been previously brought to books. Here, it should also be noted that the assumption is not made that the business will be profitable throughout its existence. KPMG’s multi-disciplinary approach and deep, practical industry knowledge help clients meet challenges and respond to opportunities.
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Step 2: Consider management’s plans if substantial doubt is raised
