‘Going Concern’ Assumption: What Does It Mean For Businesses And Company Directors?

In simpler terms, a company is considered to be a ‘going concern’ if it can continually operate and trade normally, without being at a threat of liquidation or intending to opt for the same. It is assumed that the company can be in business for at least a foreseeable period of time. Expectedly, this is not something one would associate with businesses entering insolvency. A considerable number of known brands, retailers and businesses are entering insolvency in the UK, and this is just the apt time to talk about it.

What’s going concern?

If a company prepares its financial statements as a going concern, it means that they can continue doing business for a considerable period of time. It also implies that the directors of the company have no intention or requirement to liquidate the assets. Ensuring that the going concern assumption is appropriate is important for the directors of the concern company, and there are three principles that govern the assumption –

  • Assessing going concern
  • Disclosures
  • Reviews

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The whole process of proving that the going concern assumption is right is done through disclosures and annual financial statements. This assumption doesn’t hold ground and will not be considered if the directors are looking to stop trading or want to liquidate assets in foreseeable future.

Expectedly, companies that are in tighter control of their budget, cash flow and operations, are in a position to make the going concern assumption better than those dealing with disrupted cash flow and business operations.

Auditor’s report and more

Larger companies cannot just talk about the going concern assumption, because they are subject to an auditor’s report. Budget, forecasts and borrowing are aspects that company directors need to explain, ensuring that all the relevant information that may impact the going concern status is revealed. Directors of smaller and medium scale companies must also provide more details, and the accountant will ensure that everything that’s stated is fair, accurate and not inflated. Detailed data on markets, risk management, products, cash flow and contingent liabilities must be shared.

What can cast doubt on the going concern assumption?

Auditors have the tedious job of ensuring and evaluating if everything stated by a large company is true and accurate to the best possible extent. However, there are a few major pointers that may cast concerns if the company is actually a ‘going concern’. These include negative trends in cash flow, issues with loan payments, non-recovery of debts, loss of line of credit, or legal proceedings against a company.

For smaller businesses, the possible signs remain the same, while accountant will check if the company has been able to repay debts and loans on time or whether there is loss of credit from suppliers.

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