What Is Going Concern?
Going concern is an accounting term for a company that has the resources needed to continue operatingindefinitely 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 wereliquidated. 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.
- An auditor can give a going concern opinion when they have doubts about the financial longevity of a company.
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 generallybelieve 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.
Going concern is not included in the generally accepted accounting principles (GAAP) but is included in the generally accepted auditing standards (GAAS).
Going concern is an example of conservatism where entities must take a less aggressive approach to financial reporting.
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 concernin 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. Sometimes, one-time events are enough to cause a company to go bankrupt. Consider how a single substantial lawsuit, default on a loan, or defective product can jeopardize the future of a company.
A company may not be a going concern based on the financial position on either its income statement or balance sheet. For example, a company's annual expenses may so vastly outweigh its revenue that it can't reasonably make a profit. On the other hand, a company may be operating at a profit buts its long-term liabilities are coming due and not enough money is being made.
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.
Companies can go bankrupt without ever having been a going concern issue.
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 Boarddetermined financial statements should reveal the conditions that support an entity's substantial doubt that it can continue as a going concern. Statements should also show management's interpretation of the conditions and management's futureplans.
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.
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.
Implications of Going Concern
If a company receives a negative audit and may not be a going concern, there are several implications. First, the company will now be seen as a declining investment opportunity. Companies that are not a going concern represent a significantly higher level of risk compared to other companies.
If a company is not a going concern, the company may be revalued at the request of investors, shareholders, or the board. This revaluation may be used to price the company for acquisition or to seek out a private investor. There are often certain accounting measures that must be taken to write down the value of the company on the business's financial reports.
One of larger repercussions of not being a going concern are potential credit challenges. If a company is not able to meet debt covenants, its debt may be callable. New lenders will likely be reluctant to issue new credit, or any new credit issued will be prohibitively expensive. This credit crunch may trickle down to suppliers who may be unwilling to sell raw materials or inventory goods on credit.
Is a Going Concern Good or Bad?
A going concern is often good as it means a company is more likely than not to survive for the next year. When a company does not meet the going concern criteria, it means that a company may not have the resources needed to operate over the next 12 months.
Why Is Going Concern So Important?
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 Happens If a Company Is Not a Going Concern?
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. Management must also identify the basis in which the financial statements are prepared and often disclose these financial reports with an audit report with a going concern opinion.
The Bottom Line
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.
FAQs
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.
What is an example of a going concern? ›
Examples of 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.
What does a going concern mean in business? ›
What is going concern? A company prepares financial statements on a going concern basis, under the assumption that they can continue operations for the foreseeable future. It is assumed that the company does not have the intention, or need, to liquidate its assets.
Is going concern a risk? ›
For a company facing going concern difficulties, the fundamental financial statement risk is whether the financial statements have been prepared on the correct basis of accounting, or whether any significant uncertainties have been disclosed in the financial statements.
What is the rule of going on concern? ›
"Going concern" is an accounting term used to describe a business that is expected to operate for the foreseeable future or at least the next 12 months. It assumes that the business can generate income, meet its obligations and doesn't plan or won't need to liquidate in the coming year.
What is the opposite of a going concern? ›
What is the opposite of going concern? Since going concern refers to your company being financially stable enough to continue operating, the opposite would be bankruptcy or foreclosure. This means your company no longer has enough funds to pay outstanding debts and stay in business.
Why is it called going concern? ›
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.
What are the disadvantages of going concern? ›
Disadvantages of Going Concern Concept
Financial statements are prepared at cost and not on the basis of current market value. In such a case, if the company in an event of liquidation, will have assets valued at the market value, and as such these values will be different from the value determined at cost.
What is the synonymous term of going concern? ›
Synonyms of going concern (adj. very productive, profitable) advantageous. beneficial.
Why Is going concern important? ›
The concept of going concern is crucial to shareholders because it demonstrates the stability of the entity. This assumption can affect the stock price of the business and their ability to raise capital or draw in more investors.
Three different kinds of concern are identified under Aktiengesetz: the contractual concern, the factual concern, and the flat concern.
Is going concern an asset? ›
Going concern is an accounting term for a company that has the resources to continue making enough money to stay afloat for the foreseeable future. A tangible asset is an asset that has a finite, transactional monetary value and usually a physical form.
Who decides if a company is a going concern? ›
How is 'going concern' status established? The company's financial statements reveal whether or not it is a going concern. Directors provide the financial facts and figures used to create these statements and reports, which are typically released on an annual basis.
Is going concern an assumption? ›
The going concern principle is the assumption that an entity will remain in business for the foreseeable future.
What is management's responsibility for going concern? ›
U.S. generally accepted accounting principles (GAAP) specify that management, not auditors, is responsible for assessing whether substantial doubt exists about the entity's ability to continue as a going concern.
Which statement best describes the term going concern? ›
The correct answer is B. The going concern concept assumes that the business will continue for the foreseeable future.
What is the difference between accrual and going concern? ›
Going concern: The assumption that a business entity will be in operation for the foreseeable future. 2. Accrual basis: The assumption that the financial effects of transactions and events are recognized as they occur, and not when cash is received or paid.
What is the difference between going concern and gone concern? ›
A Going Concern is a business that functions on the expectation that an event of bankruptcy / liquidation does not have a significant likelihood in the near future. A Gone Concern is instead a business that is either already in such a liquidation state or is likely to enter in the near future.
What are the three C's of business management? ›
The 3 Cs are: Company, Customers and Competitors - the three semi-fixed environmental factors in your market.
What are the three C's of business ethics? ›
When the Rainmaker internalizes and responds with these three powerful transforming pillars of Ethics, Character, Competence and Collaboration then they will live out what is right, ethical, logical, reasonable and pragmatic.
The three Cs are “compliance,” “consequences” and “contributions.” Applied Business ethics is an applied morality, like legal, engineering and medical ethics.
How do you value a business as a going concern? ›
The three classic approaches to valuation—market, cost, and income—are the valuation methods used for going concern valuation. Two different market approaches can be used to value a business.
What is the sale of a company as a going concern? ›
The sale of a corporate debtor as 'Going Concern' implies that the company would not be dissolved. The procedure of a Going Concern sale is such that during the corporate insolvency resolution, the creditors are required to identify the group of assets and liabilities.
What is the difference between asset sale and going concern? ›
The sale of a business as a going concern is different from a sale of assets, or a sale of shares or member's interest. The sale is called “a sale of a business as a going concern” because the business largely continues to run in the hands of the purchaser, as it ordinarily did before the sale.
What is another word for concern concern? ›
Some common synonyms of concern are anxiety, care, solicitude, and worry. While all these words mean "a troubled or engrossed state of mind or the thing that causes this," concern implies a troubled state of mind because of personal interest, relation, or affection.
What is the main meaning of concern? ›
/kənˈsɝːn/ a worried or nervous feeling about something, or something that makes you ... See more at concern.
Why is the going concern concept important? ›
The going concern concept helps in recording the value of such assets. It acts as a foundation for recording a business's profits and losses for a particular accounting year. It records and bifurcates the assets and liabilities of the company at a cost to ensure security and continuous long-term growth and expansion.
What is the difference between goodwill and going concern? ›
Going-concern value is the idea that a company will continue to be in business and be profitable. Goodwill is the difference between going-concern value and liquidation value. Going-concern value is often higher than the liquidation value.
Is concern positive or negative? ›
Answer. The word "concerned" is a positive word.
How do you express concern in writing? ›
Expressing worry or concern
- I'm really worried about it.
- I'm really worried about the match tomorrow.
- She's worried she won't get there in time.
- I'm afraid that I'll get there too late.
- I'm scared to death of making a fool of myself!
- I'm really nervous about the talk tomorrow.
- I've been worried sick about it.
1worried and feeling concern about something Concerned parents held a meeting. concerned about/for something The president is deeply concerned about this issue.
What are the types of concern? ›
Types of Concerns
- Relationships.
- Family.
- Grief.
- Sexuality.
- Stress.
- Motivation.
- Self-esteem.
- Conflict.
feeling of worry. something you think important. feeling you care for someone.
Does concern mean worry? ›
Worrying is about being uneasy or anxious about something. For example, imagine you have a problem. If you keep on thinking about it over and over, this is worrying. Concern is a bit different to worrying. Concern is when an issue arrests the attention of an individual where he would begin to care and feel distressed.
