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KPMG explains how an entity’s management performs a going concern assessment and makes appropriate disclosures. Q&As, interpretive guidance and illustrative examples include insights into how continued economic uncertainty may affect going concern assessments. This latest edition includes illustrative application of going concern’s most significant complexities.

Red Flags Indicating a Business Is Not a Going Concern

Proper business foresight and operational efficiency are required for a company to sustain and stay profitable for a longer term. In addition, economic recessions are crucial, which determine management’s ability when major firms fail to generate profits. The going-concern value of a company is typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns. Examples of tangible assets that might be sold at a loss include equipment, unsold inventory, real estate, vehicles, patents, and other intellectual property (IP), furniture, and fixtures.

Profitability

– Assume Microsoft is currently suing a small tech company for copyright violation over its software package. Since this software package is the only operation the small tech company does, losing this lawsuit would be detrimental. The small tech company is not a going concern because it is probable they will be out of business after the lawsuit is settled. Therefore, the change in value is not realizable; Douglas and his company must not consider the going concern assumption. Liquidating a going concern can give an investor a bad reputation among potential future takeover targets. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work.

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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. 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.

If a company receives a negative audit and may not be a going concern, there are several implications. Companies that are not a going concern represent a significantly higher level of risk compared to other companies. 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. When the demand for a product is cyclic in nature, there might not be constant top-line and bottom-line growth. – In the early 2000s, General Motors was experiencing great financial difficulties and was ready to declare bankruptcy and close operations all over the world.

This presumption may be challenged at any time, but especially during uncertain economic times. When using the going concern method, businesses can step up to their profits or losses by transfers to equity account. If the net income is zero or negative, it may be better for a company not to report any figures at all. This will help prevent the investors from getting pessimistic forecasts about future losses.

• Effective restructuring can alleviate immediate pressures and support long-term stability.
• It refers to properties sold for income-generating activities—on the registration date.
• This can lead to increased borrowing costs or default, heightening financial distress.
• It’s given when the auditor has doubts about the company and the assumption that it is a going concern.
• 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.

This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value. A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business. The going concern presumption that an entity will be able to meet its obligations when they become due is foundational to financial reporting.

This can lead to increased borrowing costs or default, heightening financial distress. On the other hand, if a company intends to close operations, financial statements will reflect such an intent—the company must disclose it. Unless disclosed, it is assumed by default that the company will realize its assets and settle its liabilities. The prime aspect of a business remains the capability and integrity of the management.

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’s given when an auditor has no concerns about the financial statements of a business or its ability to operate in the future. 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. Accountants use the going concern principle to create financial statements, which provide information about a company’s current and long-term financial health.

GAAS considers this principle a crucial parameter for determining the longevity of a business. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Finance Strategists has an advertising relationship with some of the companies included on this what is going concern website. We may earn a commission when you click on a link or make a purchase through the links on our site.