What Is Going Concern?

"Going concern" is a commonly used term for a healthy business but it also is a core accounting principle.

In accounting, a company is either a going concern or is not financially viable. This determination, based on a study of the company's financials, is generally understood to be good for at least 12 months.

Thus, the label going concerꦕn indicates that a company is making enough money to stay afloat for the foreseeable future or unti🐷l there is evidence to the contrary.

Understanding Going Concern

Accountants use going concern principles to decide what types of reporting must be recorded on a company's financial statements.

Companies that are going concerns may defer reporting 澳洲幸运5官方开奖结果体彩网:long-term assets at current vaꦚlue or liquidating value, and instead report them at cost.

Accountants who conclude that a company is a going concern generally believe the company is using its ꦅassets wisely and does no♋t have to liquidate anything to meet its financial obligations.

Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other🍌 products.

澳洲幸运♋5官方开奖结果体彩网:Generally accepted accounting principles (GAAP) deal with the issue of going concern and its assessment. GAAP provides examples of the events and conditions that may indicate reason for substantial doubt that a company can continue to operate as a going concern.

According to GAAP guidance, disclosures must be made as soon as a concl🔥usion of substantial𒈔 doubt is reached.

Red Flags that a Business Is No🌠t a Going Concern

Certain 澳洲幸运5官方开奖结果体彩网:red flags can indicate tha💫t a business may not be a going concern i🀅n the near future.

• Long-term assets listed in a company's quarterly statements or as a balance sheet line item. Neither normally appears when a company is healthy and may indicate that a company plans to sell these assets to raise money.
• The inability to meet financial obligations without substantial restructuring or asset sales. If a company acquires assets during a time of restructuring, it may plan to resell them later.
• A one-time event. A single substantial lawsuit, a default on a loan, or a defective product can jeopardize a company's future.
• Ongoing expenses that vastly outweigh revenue. Liabilities that overwhelm revenue from operations can threaten a company's ability to make a profit.
• A large debt payment coming due that can't be met with existing financial resources. Having to borrow money to pay creditors is a sign of trouble.
• Low liquidity ratios, high employee turnover, or decreasing market share. Companies with these factors are more likely to have trouble and raise doubt about their going concern status.

Going Concern Conditions

Accounting standards determine what a company must dis▨close oဣn its financial statements if there are doubts about its ability to continue as a going concern.

The 澳洲幸运5官方开奖结果体𝔉彩网:Financial Accounting St๊andards Board requires that financial statements reveal the conditions that relate to a finding of substantia🐼l doubt.

The statements should also show management's interpretation of the conditions and its plans to mitigate them.

Negative Trends

In general, an auditor who examines a company's financial statements seeks evidence that the company can continue as a going concern for one year following the time of an audit.

Conditions that lead to substantial doubt about the viability of a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.

For a company to be a going concern, it usu♛ally needs to be capable of survivi🦩ng a significant debt restructuring or massive financing overhaul if necessary.

Ther𝔉efore, it may be noted that companies that are not going ⭕concerns may need external financing, restructuring, or asset liquidation.

Implications of a Negative Report

There are several implications of a negative audiꦍt report. First, the company will be seen as a poor investment opportunity. It represents a si💎gnificantly higher level of risk than other companies.

A company that is not a going concern may be revalued at the request of investors, shareholders, or the board. This re🔯valuation may be used to pri🥂ce the company for acquisition or to seek out a private investor.

Certain accounting measures must be taken to write down the value of the company on the business's financial reports.

One of the larger repercussions of not being a going concern is the credit challenge. The company's existing debts may be callable. New lenders are unlikely to issue new credit, at least at a reasonable interest rate.

The credit crunch can trickle down to suppliers who mayꦬ be unwilling to sell raw materials or i🍸nventory goods on credit.

The Bottom Line

The term "going concern" defines a company as being financially stable. A finding that a company is not a going concern serves as a notice to its customers, investors, and suppliers that its future is in jeopardy.