Definition
Going Concern is an accounting concept that assumes a business will continue to operate indefinitely and carry out its obligations without the threat of liquidation in the foreseeable future. It implies that the company is in a stable financial condition and can generate enough resources to operate its business. If a company isn’t seen as a going concern, it means the business could potentially cease operations.
Key Takeaways
- A “Going Concern” is an accounting term which refers to a company’s ability to continue its operations and fulfill its obligations for the foreseeable future, typically a 12-month period.
- If there is substantial doubt about a firm’s ability to continue as a “Going Concern”, it signifies a potential risk for insolvency, which the auditors must disclose in their report. This can affect creditors, investors, and stakeholders’ decisions about the company.
- In contrast, a company which is not a “Going Concern” may be required to liquidate or restructure assets, a sign that the firm may be in financial distress. Understanding the “Going Concern” status of a company can be important for evaluating investment or lending risks.
Importance
The finance term “Going Concern” is significant because it represents a fundamental assumption in financial reporting.
It assumes that a company or entity will continue its operations for the foreseeable future and has neither the intention nor the need to liquidate or reduce its operations significantly.
This principle is crucial because it underlies economic decisions made based on financial statements.
If there’s doubt about an entity’s ability to continue as a going concern, the validity of assets and liabilities reported on the balance sheet could be compromised, influencing decisions made by investors, creditors, and other stakeholders.
Therefore, any threats to an entity’s status as a going concern need to be disclosed.
Explanation
The term “Going Concern” plays a pivotal role in finance and is of particular interest to investors, creditors, and other stakeholders in an entity. The fundamental concept behind this term is the assessment of an organization’s ability to continue its operations in the foreseeable future, typically the next twelve months.
Primarily, the purpose of going concern is to analyze the financial health and longevity of a business based on its current assets, liabilities, market conditions, and overall financial performance. Being identified as a “Going Concern” reassures stakeholders that the business can meet its obligations on time and continue its operations without any looming risk of insolvency or liquidation.
It is particularly significant for auditors as they give their opinion on financial statements and consider whether a company’s financial situation, operating results, and business model support its operations in the foreseeable future. Overall, the going concern principle aids business strategy, capital investment, and financial planning by informing whether the business can continue to operate sustainably.
Examples of Going Concern
Lehman Brothers: The “going concern” principle implies that a business can continue to operate indefinitely. However, the 2008 financial crisis brought about the collapse of Lehman Brothers, a stark reminder that the concept of “going concern” could be violated. Before its downfall, Lehman Brothers was valued at over $600 billion. Yet, when the real estate market crashed, so did their business and the bank filed for bankruptcy, marking the largest in U.S. history. It was a clear example that a company is not always a going concern.
General Motors: Before its bankruptcy in 2009, General Motors (GM) had been one of the world’s largest and most recognizable automobile manufacturers for over 100 years. However, due to substantial losses and inability to finance its debt, GM was no longer a viable going concern. After filing for Chapter 11 bankruptcy, it received a bailout from the U.S. government, restructured its operations, and managed to regain its status as a going concern.
Toys “R” Us: The retail giant declared bankruptcy in 2017, which was a clear sign that its auditors had doubts about its viability as a going concern. The company cited heavy competition from online retailers, struggling to repay its heavy debt load, and failure to improve its shopping experience as reasons behind its inability to continue as a going concern. Despite attempts to restructure and rescue the company, all stores finally shut down in
FAQs on Going Concern
What is Going Concern?
Going Concern is an accounting principle that assumes a business will continue its operations in the foreseeable future. It means that the entity will not be forced to halt its operations and liquidate its assets at below their cost value.
What does the Going Concern principle imply?
Under the Going Concern principle, businesses prepare financial statements with the assumption they will remain in business indefinitely. This lets businesses defer the recognition of certain expenses to future periods, when they expect to earn more revenue.
What is a Going Concern uncertainty?
A Going Concern uncertainty arises when a business is not able to continue its operations in the foreseeable future. In such cases, the auditors need to disclose this fact in the audit report. This does not necessarily mean that the company will go bankrupt; it signifies that the company may not be able to sustain itself in the long term.
What is a Going Concern audit opinion?
An auditor issues a Going Concern audit opinion if they believe the company has the ability to continue operations in the foreseeable future. If the auditor has doubts about the ability of a company to continue as a Going Concern, they will issue a qualified or an adverse opinion.
What is the relevance of Going Concern in financial statements?
The Going Concern assumption is critical to financial statements. If a company is not a Going Concern, it implies the company’s financial health is weak and it may not be able to meet its obligations. This directly influences investors and shareholders’ decisions.
Related Entrepreneurship Terms
- Auditing
- Liquidation
- Financial Solvency
- Continuity of Operations
- Financial Viability
Sources for More Information
- Investopedia : A reliable source of information about a broad range of finance topics including going concern.
- AccountingTools : Provides in-depth articles and learning materials on accounting and finance terms.
- Corporate Finance Institute : Has a wide range of resources on finance and accounting, including detailed explanations of terms like going concern.
- My Accounting Course : Offers a comprehensive accounting dictionary and library of resources.
