What Is Going Concern?

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 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.

KEY TAKEAWAYS

 Going concern is an accounting term for a company that is financially

stable enough to meet its obligations and continue its business for the
foreseeable future.
 Certain expenses and assets may be deferred in financial reports if a
company is assumed to be a going concern.
 If a company is no longer a going concern, it must start reporting
certain information on its financial statements.
 Negative trends that lead to no longer being a going concern include
denial of credit, continued losses, and lawsuits.

Understanding 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.

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.

Red Flags Indicating a Business Is Not 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. Listing the value of long-term assets may indicate
a company plans to sell these assets.

A firm's inability to meet its obligations without 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.
Going Concern Conditions
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. 2  Statements should also show
management's interpretation of the conditions and management's future plans.

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.

Examples of Going Concern

 XYZ Limited manufactures a special chemical that it then markets
and sells. Suddenly, the US government imposes a ban on the
manufacture, export, import, and sale of this special chemical in the
country. If this chemical is the only product that XYZ Limited
creates, then the company will no longer be a going concern.
 A state-owned company is in a tough financial situation and is
struggling to pay its debt. The government gives the company a
bailout and guarantees all payments to its creditors. The state-
owned company is a going concern despite its poor financial
position.
Advantages of Going Concern Concept
There are several advantages of the going concern concept:

 Companies undertake the substantial purchase of fixed assets in the

initial years which involve immediate expenditure, however, the
benefit of the asset is spread out throughout its life, which is usually
more than a year. The concept recognizes recording of such costs
over the life of the assets.
 It accommodates bifurcation of assets and liabilities as short term,
12-month period, and long term, usually more than 12 months, also
ingraining confidence in the company that it will continue to
function in the future.
 It is the basis on which income or profits are recorded over the
years in which they pertain to.
 The assets and liabilities are recorded at cost in order to show the
security of the company and that it does not operate as a means to
liquidate its assets and liabilities but is committed to continuous
long-term growth and expansion.

Disadvantages of Going Concern Concept

The going concern concept does come with downsides and limitations:

 The financial reports are prepared at cost and not at its current

market value. In the event of liquidation of the company due to any
unforeseen circumstance, the financial statements are then brought
to their current market value. However, these figures may differ
greatly from the ones prepared at cost.
 In case of the business shutting down its operations, the financial
statements are drawn on-going concern basis. This may lead to
incorrect information being depicted and as a result, mislead all the
relevant stakeholders involved.
 Any change in law may affect the business and the idea of going
concern may not be practical for the organization and would bring
about abrupt and prompt solutions when recording financial
transactions.