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Going Concern Assumption Accounting Definition + Examples

going concern principle

If the company is unable to generate sufficient revenue or secure additional financing, it may be unable to meet its obligations and may be forced to cease operations. The purpose of this chapter is to introduce primary evidence based on the relevance of the going-concern going concern principle in sustainability and non-financial reporting and disclosure. This is an innovative perspective of analysis directed towards showing the role and characteristics of the going-concern in sustainability reporting and disclosure towards stakeholders.

going concern principle

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. Accountants use the going concern principle to create financial statements, which provide information about a company’s current and long-term financial health. The concept of depreciation and amortization are based on the assumption that a business will continue to perform its operations in the near future (this period is the next 12 months after an accounting period). In this example it is clear that the going concern basis is inappropriate in the entity’s circumstances.

AccountingTools

Ultimately, whether or not going concern matters to you depends on your role about the company. In the absence of evidence to the contrary, an entity is viewed in operation indefinitely. The repricing of the Warrants is conditional upon the approval of the Toronto Stock Exchange and the final terms of these amendments, including the definition of “adjusted EBITDA”, remain subject to the completion of all the legal documentation to the satisfaction of both the Company and Marathon. It is the basis on which the profits and losses of the business are recorded for the year to which it belongs. The company shut downs its operation due to government restrictions on this chemical manufacturing and marketing.

If conditions are changing rapidly, management’s evaluation may need to be updated frequently up through the date of issuance of the related financial statements. Management must also consider the likelihood, magnitude and timing of the potential effects of any adverse conditions and events. Management’s evaluation of whether substantial doubt is raised (step 1) does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (step 2). As mentioned earlier, it is not the auditor’s responsibility to determine whether, or not, an entity can prepare its financial statements using the going concern basis of accounting; this is the responsibility of management.

Private companies

More elaborate considerations need to be made if the company’s financial and earnings position is strongly impaired so that the company’s going concern could be endangered from a financial, operational or legal point of view already for the upcoming financial reporting period. To this end, the management must weigh up the existing financial problems, slumps in sales markets, bottlenecks in factor markets, legal risks etc. against positive circumstances and make an assumption about the going concern. In order to make a careful assessment, up-to-date, sufficiently detailed and concrete planning documents will regularly be required here, which provide information on the expected future cash flows for a period of at least 12 months after the balance sheet date. An entity must include disclosures related to uncertainty about its ability to continue as a going concern in the notes to the financial statements in annual and interim periods until the conditions or events giving rise to the uncertainty are resolved. As the conditions or events giving rise to the uncertainty and management’s plans to alleviate them change over time, the disclosures should change to provide users with the most current information, including information about how the uncertainty is resolved.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free. There are also a number of quantifiable, measurable indicators that auditors use to measure going concern. Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern.

Internal control over financial reporting

Thus, evidence provided by this chapter supports reflections on the opportunity to identify and assess the going-concern in non-financial (voluntary and mandatory) disclosure. This analysis is qualitative and is also directed towards investigating the business continuity and the connection with the going-concern applied to the corporate systems. Since the appropriateness of the going concern premise is a fundament for the financial statements, the auditor must assess adequacy of management’s judgment regarding the going concern as part of his financial statements audit. To this end, he shall already pay attention to indications of any facts that might jeopardize the survival of the company when planning the audit, as well as in its further course. A current definition of the going concern assumption can be found in the AICPA Statement on Auditing Standards No.1 Codification of Auditing Standards and Procedures, Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern” (AU Section 341).

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