Going concern business finance assists businesses in acquiring an existing business. It treats a company as able to continue operating indefinitely unless evidence shows otherwise. It also assesses a company’s ability to generate sufficient income to avoid bankruptcy and remain operational.
If a business is not a going concern, it is bankrupt and liquidates its assets. At this stage, the business reports certain financial information differently. Companies also defer certain expenses and assets in financial reports when they assume going concern status.
Negative trends such as denied credit, continued losses, and litigation indicate that a business may no longer operate as a going concern. In such cases, the company must adjust its financial reporting requirements.
Accountants apply going concern principles to determine financial statement reporting methods. Companies report long-term assets at cost when they operate as going concerns. They also avoid using liquidation values unless the business ceases operations.
A company remains a going concern when asset sales do not disrupt its operations. For example, a company may close a branch and reassign employees without affecting overall continuity.
Accountants who assess a company as a going concern assume that it uses assets efficiently and avoids unnecessary liquidation. They also guide decisions on asset sales, cost reductions, and product changes.
Although going concern does not form part of GAAP, auditors apply it under Generally Accepted Auditing Standards (GAAS).
Red Flags Indicating a Business is not a Going Concern
Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets.
A firm’s inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later.
Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. Financial statements should reveal the conditions that support an entity’s substantial doubt that it can continue as a going concern. Statements should also show management’s interpretation of the conditions and management’s future plans.
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. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, litigation against the company, and denial of credit by suppliers.
Contact us for assistance with procuring going concern business finance.
