Going Concern

Going Concern

What is a going concern?

A going concern is a business that is expected to continue operating for the foreseeable future—commonly interpreted in accounting as at least the next 12 months. In accounting practice, a company is assessed as either a going concern or not; that assessment determines how assets and liabilities are reported and what disclosures are required.

Key takeaways

• Being a going concern allows a company to report long-lived assets at cost rather than liquidation value and to defer certain expenses.
• If substantial doubt exists about a company’s ability to continue, auditors must disclose it and management must explain the reasons and mitigation plans.
• Red flags include sustained losses, inability to meet obligations, denial of credit, large imminent debt payments, and disruptive one‑time events.
• A negative going‑concern finding can limit access to credit, prompt asset write‑downs, and damage investor and supplier confidence.

How going concern affects accounting

Accounting frameworks (e.g., GAAP and IFRS) use the going concern assumption to determine measurement and disclosure approaches:
* Long‑lived assets and liabilities are typically recorded on the expectation the business will continue operations.
* If substantial doubt exists, companies must disclose the conditions causing doubt, management’s plans to address them, and any effects on financial statements.
* Auditors assess whether there is substantial doubt about the company’s ability to continue for at least one year from the financial statement date and include appropriate language in the audit report.

Common red flags

Indicators that a company may not be a going concern include:
* Ongoing, material operating losses or negative cash flows from operations.
* Difficulty meeting debt covenants or loan defaults.
* Denial of trade credit from suppliers or refusal of lenders to extend financing.
* Large debt payments due soon with insufficient resources to pay.
* Significant, unexpected one‑time events (e.g., major lawsuit, product failure) that threaten viability.
* Low liquidity ratios, high employee turnover, and rapidly shrinking market share.
* Selling long‑term assets or listing them for liquidation to raise cash.

Fast fact: Companies can enter bankruptcy without an earlier formal going‑concern warning if deterioration happens rapidly.

Conditions and assessment

Auditors and management evaluate both quantitative and qualitative factors:
* Quantitative: recent and forecasted cash flows, liquidity, debt maturities, and covenant compliance.
* Qualitative: market conditions, legal proceedings, management capability, and access to additional financing.
Management should prepare and disclose realistic plans—such as cost reductions, asset sales, refinancing, or raising equity—and explain how those plans mitigate the identified risks.

Implications of a negative going‑concern conclusion

A formal conclusion that substantial doubt exists—or an adverse audit opinion related to going concern—has several consequences:
* Credit markets: lenders may call loans, refuse new credit, or impose higher rates and stricter terms.
* Suppliers and customers: reduced confidence may lead to tighter payment terms or lost business.
* Financial reporting: assets may require write‑downs to liquidation or reduced values; additional disclosures become mandatory.
* Investment and acquisition activity: valuations typically fall, and potential investors may demand higher returns or decline to invest.
* Restructuring: companies often need debt restructurings, asset sales, or emergency financing to restore viability.

What management must do if the company is not a going concern

If management concludes there is substantial doubt, they must:
* Disclose the conditions causing doubt and the anticipated effects on operations and financial position.
* Describe plans to mitigate the doubt and evaluate the likelihood those plans will succeed.
* Provide any additional required financial statement information or notes under applicable accounting standards.

Conclusion

The going concern assessment is a critical indicator of a company’s financial health. A positive going‑concern assumption supports normal accounting treatments and market confidence; a finding of substantial doubt requires clear disclosure, potential revaluation of assets and liabilities, and often urgent remedial action to protect stakeholders’ interests.