It’s given when the auditor has doubts about the company and the assumption that it is a going concern. A qualified opinion can be a concern to investors, lenders and other stakeholders. An entity has borrowings of $10m which became immediately repayable in full on 31 March 20X2. The entity is already in breach of its agreed overdraft and the bank has refused to renew the borrowings. The entity has also been unsuccessful in applying to other financial institutions for re-financing.
The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. On the other hand, if a company intends to close operations, financial statements will reflect such an intent—the company must disclose it.
The liquidation value of a company will even be lower than the value of the company’s tangible assets, because the company may have to sell off its tangible assets at a discount—often, a deep discount—in order to liquidate them before ceasing operations. 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. Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable. 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.
For example, one criteria for classification of assets and liabilities into current and non-current is whether they are realized/settled within normal course of business. In a non-going concern basis, income, expenses, assets, liabilities and equity are recorded at values that reflect the winding up of business, i.e. assets are recognized at values they are expected to fetch if sold right away, etc. It is an accounting assumption going concern concept example that defines the longevity of a business operation. Unless the company discloses, it is assumed that it possesses adequate assets for fulfilling long-term liabilities. So, when managements consider such an assumption inappropriate, they prepare financial statements using the breakup basis. The breakup basis reports assets based on the amount that is likely to be realized from the sale and liabilities—the net realizable value.
When a business is started, it is assumed that it will not be dissolved in the near future. The concept of going concern states that all records are made on the assumption that the business will continue for the foreseeable future. – In the early 2000s, General Motors was experiencing great financial difficulties and was ready to declare bankruptcy and close operations all over the world. https://www.bookstime.com/ In normal circumstances, GM would not be considered a going concern, but since the Federal government stepped in, we have no reason to believe that GM will cease to operate. Let’s go over some red flags you can look for to see if there could be a bankruptcy in the company’s future. Performance Financial Statements Analysis is an important procedure in assessing the going concern.
Going concern concept is closely linked with business entity concept, materiality concept and historical cost concept. For example, in assessing going concern, a business is looked at in isolation of its owners, etc. (in line with entity concept); and only material reasons affect the likelihood of continuing operations (in line with materiality concept), etc. The going concern concept accounting reveals the true financial integrity of an organization. It is an action an organization conducts to ensure a clearer picture of their financial and growth related concerns.
