What is Going Concern?

Going concern is an accounting assumption that a business will continue operating for the foreseeable future and will be able to meet its obligations as they become due. The concept of going concern is very important in financial accounting as it impacts the measurement, classification, and presentation of all the items on the financial statements.

What Does Going Concern Mean in Accounting?

In the field of accounting, the going concern assumption is taken for granted in all accounting records, as it means that the company will be in business for the foreseeable future and will neither go out of business nor be liquidated or declared bankrupt.

It is an assumption which is built into U.S. GAAP as well as IFRS, and allows the accountants to:

• Value the assets at their historical cost rather than liquidation value
• Classify assets and liabilities based on the expectation that the business will continue its normal operations rather than immediately liquidating its assets and settling its obligations. 
• Recognize the income and expense allocation over future periods
• Allocate costs over many accounting periods

Going concern and liquidation bases of accounting

If it is determined that the liquidation of the business is inevitable and not only likely, then the enterprise has to give up its use of the going concern basis of accounting and go over to the liquidation basis of accounting (ASC 205-30). 

In the liquidation method of accounting, the asset values should be reported at their estimated net realizable (selling) value rather than on historical cost, and all exit costs should be accrued.

What Happens After a Going Concern Doubt is Raised?

• Disclosure: The company is required to disclose, in the footnotes to its financial statements, the circumstances creating doubts, its assessment and actions taken in response.
• Auditor’s report: In the case the auditor confirms that substantial doubt exists (and it was not fully addressed by management’s plans), it will include an “emphasis of matter” or “substantial doubt” paragraph in the audit report; sometimes this is referred to as “going concern.”
• Consequences: Going concern is likely to create default on loan covenants, deter investors, hamper financing efforts, and affect the share price (publicly held companies). Going concern is usually requested by lenders and investors during their due diligence.
• Solution: In case the company stabilizes (receives new money, becomes profitable, renegotiates its debts), going concern wording is no longer included in the following audit report.

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