Definition
Going concern is a financial term, which signifies that a company is capable of continuing its operations and fulfilling its obligations for the foreseeable future without the threat of liquidation. It indicates that the business has neither the intention nor the necessity to halt operations and can generate sustenance for its employees and value for its investors. The term is important for investors, creditors, and other market entities, as it assures them that the company will not cease its operations in the near term.
Phonetic
The phonetics of the keyword “Going Concern” is: /’ɡəʊɪŋ kən’sɜːrn/
Key Takeaways
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- Definition: Going Concern refers to the assumption that a company or entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on. In simpler terms, it means that the company has neither the intention, nor the need, to liquidate or significantly curtail its operations.
- Importance in Financial Reporting: The concept of Going Concern is critically important in financial reporting. Financial statements are typically prepared under the assumption that the business will remain in operation indefinitely. If a business is not a going concern, it means the company may soon go bankrupt or out of business, which changes the valuation of assets and liabilities.
- Role of Auditors: When preparing financial audits, auditors evaluate whether the company has the ability to continue as a Going Concern. This involves a look into the future to decide if the company can continue to meet its obligations as they fall due. This is to ensure stakeholders are properly informed about the company’s financial health. If there are serious concerns about the viability of the company, the auditors will express a qualified or adverse opinion in their report.
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Importance
The business/finance term “Going Concern” is crucial as it refers to a company’s ability to continue its operations long enough to fulfill its obligations, goals, and commitments. It’s essential for financial reporting purposes because auditors examine whether a company is a going concern when performing an audit. If there are concerns about the company’s ability to continue functioning, this could significantly impact the valuation of assets and liabilities, leading to potential amendments in the financial statements. The going concern principle also holds significance for investors, creditors, and other stakeholders as it helps them evaluate the company’s future prospects and decide on their investment or lending decisions. Ultimately, the term guides decisions on the company’s financial viability and long-term survival.
Explanation
The purpose of the “going concern” principle essentially provides a fundamental assumption within financial reporting. It signifies that a company has the resources necessary to continue operating indefinitely until there is substantial evidence to suggest otherwise. In essence, when a company’s financial statements are prepared, one key presumption is that the company will not liquidate in the near future and can feasibly meet its obligations, maintain its level of operations, and achieve its objectives.”Going concern” is used as a basic, underpinning principle in accounting and auditing, as it significantly affects how financial information is recorded and presented. For instance, if an auditor raises doubts about a company’s ability to continue as a “going concern,” it would suggest possible financial instability of the company which could impact a company’s credit terms, its relations with suppliers and also affects investor sentiment. Understanding the concept of the “going concern” is crucial for both stakeholders and potential investors as it delivers them important insights into the company’s financial health and long-term viability.
Examples
1. Lehman Brothers: Before its bankruptcy in 2008, the financial services firm Lehman Brothers was deemed as a going concern, despite its financial troubles. The firm was expected to meet its short-term and long-term obligations, continue its operations, and remain solvent. However, due to the subprime mortgage crisis and the subsequent financial crisis, Lehman Brothers ended up filing for bankruptcy, thus shaking up the global financial market.2. General Motors: Prior to its bankruptcy in 2009, General Motors, an American auto manufacturer, was considered a ‘going concern.’ The firm was expected to continue its operations and meet its financial obligations. However, the global financial crisis, along with other factors, led to the bankruptcy of General Motors. Although the firm has since restructured itself and successfully emerged from bankruptcy, its going concern status was in serious doubt during the financial crisis.3. Blockbuster: Once a beloved video rental store, Blockbuster was seen as a ‘going concern’ because it was capable of fulfilling its obligations and was expected to continue operations. The rapid shift in technology and consumer preferences towards online video streaming platforms like Netflix however, severely hit its business model. Unable to adapt to the changing business landscape, Blockbuster filed for bankruptcy in 2010, indicating that its ‘going concern’ assumption was no longer valid.
Frequently Asked Questions(FAQ)
What is a Going Concern?
A Going Concern is an accounting term for a company that has the resources needed to continue to operate indefinitely until a company provides evidence to the contrary. This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy.
How is a Going Concern assumption used in the financial aspect of the business?
The Going Concern assumption guides the accounting practices of businesses. If a company is a Going Concern, it’s assumed to be able to incur obligations and discharge liabilities for more than a year. This influences a company’s choice of accounting methods such as depreciation and amortization.
What happens if a company is not considered as a Going Concern?
An entity not considered a going concern could be nearing bankruptcy or going out of business. Thus, its assets might be valued at liquidation values, rather than normal operating or ‘enterprise’ values. This can drastically affect a company’s balance sheet.
Who evaluates whether a company is a Going Concern?
The company’s auditors typically evaluate the Going Concern. They make this assessment during their audit of the company’s financial statements, using financial data, and other significant information.
What is a Going Concern Notice?
A Going Concern Notice is a note made in an audit report when the auditor believes the company has a significant inability to continue operations in the near future based on the assessment of its financial condition. This notice signals that the company is at risk of liquidation or bankruptcy.
What is the impact of a Going Concern uncertainty on investors?
Going Concern uncertainty can cause serious harm to the confidence of investors, as it implies a significant risk related to the company’s ability to continue its operations in the foreseeable future. It may cause the stock value to decrease and affect the decision-making of potential investors and creditors.
Related Finance Terms
- Auditor’s Opinion: A judgement made by an auditor about the health of a company’s financial statements, including whether it’s a going concern or not.
- Liquidation: The process of winding up a business, selling its assets and paying its creditors. This is the opposite of a going concern, which assumes the company will continue in operation.
- Solvency: A measure of a company’s ability to meet its long-term debts. If a company is not solvent, it may not be considered a going concern.
- Financial Viability: A measure of a company’s ability to continue as a going concern by generating adequate revenue to cover its operational costs.
- Bankruptcy: A legal status where a person or organization cannot repay debts to creditors, often leading to the entity no longer being viewed as a going concern.
