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What Is The going Concern Basis Of Accounting And How Is going Concern Disclosed In The Financial Statements?

Going Concern

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. 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.

  • A going concern is a business that is expected to continue to operate for the foreseeable future—which, for accounting purposes, is typically considered to be a period of at least twelve months from the date of the audit of its financial statements.
  • The responsibility to assess the going concern of a company lies with its management.
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  • The going concern assumption is a basic underlying assumption of accounting.
  • Analyzing the recent trends of the business can be useful to determine the company’s potential to earn profits, its current value and consequently its going concern status.
  • The audit procedures performed to evaluate the significant elements of management’s plans and evidence obtained, if applicable.
  • The auditor should remain alertthroughout the audit for conditions or events that raise substantial doubt.

It is important to consider at least one severe but plausible downside scenario. Covenants in loan agreements may provide lenders with an opportunity to withdraw financing. Management should reassess the availability of financing because it may not be easily replaced and the costs may be higher in the current circumstances. Although some sectors and jurisdictions are more affected than others, all companies need to consider the potential implications for the going concern assessment. If the auditee is not a going concern, it means that the entity might not be able to sustain itself within the next twelve months. Whereas at that time the aid was a given, and the company had never stopped operating as a going concern. OverdraftOverdraft is a banking facility that offers short-term credit to the account holders by allowing them to withdraw money from their savings or current account even if their account balance is or below zero.

Cash Flows

A case of such information is a company’s inability to continue operating without significant asset sales or debt restructurings. If such was not the situation, a company would basically be acquiring assets when it knows that it will be shutting down its activities and reselling those assets to another organization. The going concern concept states that a business will continue its operations for the foreseeable future. This implies that the company will not be forced to discontinue its operations and liquidate its assets at extremely low costs. An entity is assumed to be a going concern in the absence of significant information to the contrary.

Going Concern

The Company has incurred accumulated losses of $2,891,727 as of March 31, 2017. Cash flows used in operations totaled $555,897 for the year ended March 31, 2017. So, if December 31, 2017, financial statements are available to be issued on March 15, 2017, the preparer looks forward one year from March 15, 2017. Then, the preparer asks, “Is it probable that the company will be unable to meet its obligations through March 15, 2018? The evaluation initially shall 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 .

Solvency Ratios Vs Liquidity Ratios: What’s The Difference?

FASB’s Codification 842, Leases, requires companies to make significant changes in the way they report operating leases. But one of the initial challenges might be simpler than you think … find out more with this report. No matter what, just remember Embark is always here to pick up those substantial doubt reins and guide a company in the right direction. Finally, these wouldn’t be official Embark musings unless we at least mentioned internal controls, right? As they pertain to going concern, we emphasize the fact that management still needs to consider internal controls and business processes around going concern evaluations. To give you a heads-up on potentially serious issues you should immediately address? Well, that’s precisely what a going concern assessment is for investors and, as we’re about to explain, that particular dash light wields a mighty sword.

In the event of liquidation of the company due to any unforeseen circumstance, the financial statements are then brought to their current market value. 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. This can protect investors from continuing to risk their money on a business that may not be viable for much longer. It’s given when an auditor has no concerns about the financial statements of a business or its ability to operate in the future. The continued effects of the pandemic, along with the implementation of new accounting standards, have companies and their auditors confronting substantial change in year-end audits. Going Concern The directors have prepared the financial statements on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and extinguishment of liabilities in the ordinary course of business.

Going Concern

Concept Of Going ConcernGoing Concern concept is an accounting principle which states that the accounting statements are formulated with a belief that the business will not be bankrupt or liquidated for the foreseeable future, which generally is for a period of 12 months. The concept is an internationally recognized accounting principle that businesses follow.

Documentation Requirements

Another requirement is for the auditor to consider the adequacy and the appropriateness of the disclosures around the conditions and events relative to going concern. Those requirements for disclosure are essentially in the accounting framework, so they’re embedded in U.S. 2 The guidance provided in this section applies to audits of financial statements prepared either in accordance with generally accepted accounting principles or in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. References in this section to generally accepted accounting principles are intended to include a comprehensive basis of accounting other than generally accepted accounting principles . However, generally accepted auditing standards do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern.

Going Concern

A qualified opinion might lead investors to avoid a company or even sell their shares in the company. Getting additional financing, if possible, or restructuring debt to avoid liquidating the company. A qualified opinion, on the other hand, is not what a business wants to see.

Relevant Dates

If there’s significant evidence that a privately held business might not be viable under the going concern assumption, the auditor must disclose it in the audit report. Even if the business’s financials aren’t audited, an accountant who has concerns about the business’s viability should disclose those concerns to the business owner. It is possible for a company to mitigate an auditor’s view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed.

  • To seek financial support from shareholders and/or government programmes designed to support businesses.
  • Cash flows used in operations totaled $555,897 for the year ended March 31, 2017.
  • If substantial doubt remains, the auditor also should document the possible effects of the conditions or events on the financial statements and the adequacy of the related disclosures.
  • The going concern assumption can also provide an insight into a business for potential lenders or investors when they view the company’s financial statements.
  • It is important for companies to consider not only traditional sources of financing but also other sources – e.g. supply chain financing and/or reverse factoring.

The accounting policies are consistent with those used in the previous period, except where it is disclosed.The Financial Statements have been prepared on Going Concern basis since there is no intention of dissolving the institution in future period . Going Concern The Group’s operations are cash generative and the current cash position is sufficient to cover ongoing operating and administrative expenditure for the next 12 months. Going Concernmeans the ability of the company to continue operations/business in the future with the availability of the resources. However, recent global events have impacted the economic climate in different ways, making the going concern assessment more challenging for some companies.


In addition, he consults with other CPA firms, assisting them with auditing and accounting issues. Substantial doubt and management’s plans that alleviated the substantial doubt. The audit procedures performed to evaluate the significant elements of management’s plans and evidence obtained, if applicable. So, if management’s plans are expected to work,does the company have to explicitly state that management’s plans will alleviatesubstantial doubt? Management’s plans should be considered only if is it probable that they will be effectively implemented. Also, it must be probable that management’s plans will be effective in alleviating substantial doubt.

Accordingly, the absence of reference to substantial doubt in an auditor’s report should not be viewed as providing assurance as to an entity’s ability to continue as a going concern. In that case, management is required to make disclosures required by the accounting framework made by management. The auditor is required to add an emphasis-of-matter paragraph to the auditor’s report that clearly articulates the nature of substantial doubt about going concern and would direct the users of the financial statements to the appropriate disclosures in the financial statements. The next step then is to consider the evaluation that management has performed. The first question of course is, do you agree as an auditor that management has identified all the appropriate conditions and events that need to be considered? Have they extended that evaluation period out to the reasonable period of time? Remember, management’s evaluation is valid at the point at which they make that evaluation based on known information.

Factors To Consider

Yet, if the value of an asset has been damaged or weakened, then the carrying amount of the asset could be reduced to an amount lower than its carrying value. If a business was not expected to continue operations within the next 12 months, it would likely be forced to close down or declare bankruptcy. The Concept is the assumption that an organization will continue to operate indefinitely and without needing to liquidate its assets and pay off creditors. This concept not only helps build a more systematic approach to the recording of the financial information, but it also provides a reasonable understanding of the business, its growth and long-term financial stability. On the off chance that there is an issue, the audit firm should qualify its audit report with a statement about the issue. 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. The valuation of a company is important from the shareholders’ and investors’ perspective.

  • This latest edition includes updated guidance on changes in AICPA auditor’s report terminology.
  • If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure.
  • An insolvent company may choose to sell its assets one by one or all of its assets together.
  • Assets are valued for their individual worth rather than their value as a combined unit.
  • Short RunA Short Run in economics refers to a manufacturing planning period in which a business tries to meet the market demand by keeping one or more production inputs fixed while changing others.
  • 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.

Keep in mind, however, that if a company plans to obtain additional liquidity through uncommitted credit, it is not used in the evaluation of whether substantial doubt is raised, but rather when evaluating management’s plans in step two of the assessment. Are you preparing financial statements and wondering whether you need to include going concern disclosures? Or maybe you’re the auditor, and you’re wondering if a going concern paragraph should be added to the audit opinion. You’ve heard there are new requirements for both management and auditors, but you’re not sure what they are. External events that create economic uncertainty may have a significant impact on a company’s ability to continue as a going concern and might require robust assessment and entity-specific disclosures.

Certainly, it would be hard to deny that the pandemic and COVID-19 create events and conditions that may cause doubt about an organization’s ability to continue as a going concern. Depending on the sector in which the entity operates, it may or may not cause significant doubt. The example that everybody uses these days is, if your business happens to make toilet paper, the environment is probably not leading you to question your ability to continue as a going concern. This is especially important for forecasting that management uses in the assessment, where it’s critical a company designs and implements controls appropriately and uses complete and accurate data. Likewise, a company must also think about any related controls, including required review controls necessary to complete the assessment. Aside from those four main items, other obligations may arise that aren’t necessarily contractual, including legal proceedings and any resulting settlements.

Accountants may use going concern principles to determine how a company should handle a reduction of expenses, sale of assets or shifts to other products. If an auditor issues a negative going concern during an audit, this implies that the auditor suspects the company will have to close business for financial reasons within the next 12 months. We have received questions from members about whether it would be prudent for management to delay the issuance of its financial statements until some of this uncertainty is resolved. First of all, this would be contingent on whether management has the flexibility to delay issuance of its financial statements.

Prepare Financial Statements

An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. 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”.