The going concern principle assumes that a company will continue to operate for the foreseeable future. On the other hand, this means that the company will not be compelled to shut down operations and dispose of its assets at fire-sale rates in the near future. By adopting this assumption, the cheap small business accountant is justified in delaying the recognition of certain expenditures to a later period, when the entity is presumably still in business and maximizing the value of its assets.
In the absence of sufficient information to the contrary, an entity is believed to be a going concern. An entity's inability to meet its commitments when they become due without significant asset sales or debt restructurings is an example of such contradictory facts. If this were not the case, a business would be buying assets with the aim of shutting down its operations and reselling the assets to a third party.
If accountants in London believe that an entity is no longer a going concern, the question of whether its assets are impaired arises, and the carrying amount of those assets may be written down to their liquidation value. As a result, the value of a going company is higher than its breakup value, because a going company can potentially produce profits in the future.
Because the idea of a going concern isn't defined anywhere in generally accepted accounting standards, it's open to a lot of discretion as to when an organization should report it. The examination of an entity's ability to continue as a going concern is, nevertheless, mandated by generally accepted auditing standards (GAAS).
Evaluation Items for a Going Concern
The auditor assesses a company's capacity to continue as a going concern for a period of not more than one year after the financial statements are audited. When determining if there is a considerable question about an entity's ability to continue as a going concern, the auditor analyses the following factors, among others:
- Negative operating results trends, such as a string of losses
- The company's loan fails
- Suppliers refuse to provide the company trade credit.
- Long-term commitments that are uneconomical for the company
- The corporation is facing legal action.
If a problem exists, the audit firm must include a comment about it in its audit report.
Concern Mitigation on the Move
By having a third party guarantee the business's debts or commit to supply more funds if needed, a corporation can minimize an auditor's opinion of its going concern status. By doing so, the auditor has a reasonable expectation that the business will continue to operate for the one-year period required by GAAS.
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