Going Concern
BeginnerGoing concern is the assumption that a business will continue operating for the foreseeable future, usually at least twelve months, rather than closing down or being forced to sell its assets.
Financial statements are normally prepared on the basis that the business will keep running. This affects how assets are valued. Equipment, for example, is shown at its cost less depreciation, reflecting its use over future years, rather than at the much lower price it might fetch in a quick sale.
Managers must assess whether this assumption is reasonable, and auditors check their judgment. Warning signs include repeated losses, running out of cash, being unable to repay debts as they fall due or losing a major customer.
If there is serious doubt about whether a business can continue, this must be disclosed in the financial statements, and the auditor may highlight it in their report. If the business is clearly going to close, the statements may need to be prepared on a different basis, valuing assets at what they would raise if sold.
A going concern warning is a significant red flag for investors and lenders, as it signals real risk that the company may fail.
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