This means the 12-month period is a minimum and management needs to exercise judgment to determine the appropriate look-forward period under the circumstances. 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. 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 a small branch office that reassigns the employees to other departments within the company.
In our experience, if there are such material uncertainties, then the company usually provides disclosure as part of the basis of preparation note in the financial statements. 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 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. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits. The “going concern” concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized.
Disclosure of a going concern qualification
The reason the going concern assumption bears such importance in financial reporting is that it validates the use of historical cost accounting. Going concern is an accounting term, which means a business is financially stable and can operate with the expectation of indefinite existence. A company must begin disclosing specific information on its financial statements if it can no longer be considered a going concern.
- Management is required to disclose this fact and must provide the reasons why they may not be a going concern.
- As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.
- The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt.
- Unlike IFRS Standards, if substantial doubt is raised in Step 1 about the company’s ability to continue as a going concern, the extent of disclosure depends on the outcome of Step 2 and whether that doubt is alleviated by management’s plans.
- Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
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. When an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business. This influences which products we write about and where and how the product appears on a page.
Going Concern Assumption
Our IFRS Standards resources will help you to better understand the potential accounting and disclosure implications of COVID-19 for your company, and the actions management can take now. The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. 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. IFRS Standards do not prescribe how management should evaluate its plans to mitigate the effects of these events or conditions in the going concern assessment.
Going-Concern Value vs. Liquidation Value
This means management needs to run two sets of forecasts, before and after management’s plans, whereas IFRS Standards are not prescriptive in this regard. 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. 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. A company may not be a going concern for a number of reasons, and management must disclose the reason why.
How is going concern determined?
There is “a lot of gray area” when judging whether a company is a going concern, said Denise Dickins, a former partner at an auditing firm who is now professor emeritus at East Carolina University and a board member at public companies. Going concern is important because it is a signal of trust about the longevity and future of a company. Without it, business would not offer nearly as much credit sales as suppliers, vendors, and other companies may not pay the company if there is little belief these companies will survive.
What Is a Going Concern Opinion?
The going concern assumption – i.e. the company will remain in existence indefinitely – comes with broad implications on corporate valuation, as one might reasonably expect. In the context of corporate valuation, companies can be valued on either a going concern basis or a liquidation basis. 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. 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. 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.
Management should critically assess the disclosure requirements of IAS 1 and consider drafting required disclosure language early in the financial reporting process. 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. 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. If a company is not a going concern, that means there is risk the company may not survive the next 12 months. Management is required to disclose this fact and must provide the reasons why they may not be a going concern.
Going concern: IFRS® Standards compared to US GAAP
However, in our view, there is no general dispensation from the measurement, recognition and disclosure requirements of the Standards in this case, and these requirements are applied in a manner appropriate to the circumstances. A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two). Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations. 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. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.
KPMG explains how an entity’s management performs a going concern assessment and makes appropriate disclosures. 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. If managers or auditors believe that a company is at risk of going bust within 12 months, they are required to formally express that doubt in their financial accounts.
Consider how a single substantial lawsuit, default on a loan, or defective product can jeopardize the future of a company. Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be repeal the lifo and lower of cost or market inventory accounting methods 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. Listing the value of long-term assets may indicate a company plans to sell these assets.