Going Concern Concept

May 31st, 2006 Comments off
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GOING CONCERN CONCEPT

Business is continuing.

Resources will be used for the future.

Depreciation of fixed assets relies very heavily on this concept.

Liquidation applies to the balance sheet if failure is probable.

This concept assumes that the business entity will continue in business in the foreseeable future. As the intention is not to close its business, the company should not value their assets at amount realizable on a forced sale/ liquidation sale.

It is very important to understand that the Board of Directors need to make all necessary assessment ofthe enterprise’s ability to continue as a going concern.

Uncertainties on going concern should be disclosed and if the enterprise’s financial statements are not prepared on a going concern, its needs to disclose all the facts and the basis and reason.

Otherwise, this non-disclosure tantamount to fraud with the intention to deceive the investors and other outsiders.

Illustrations

Based on the following scenario, do you still assume the company is on a going concern:

A listed Company ABC’s share price has nose dived to 40% level of what you seen six months ago due to speculation by market punters?

Yes, the company ABC is definitely on a going concern. There is no fundamental changes in its business.

But what this time the scenario is due to increased competition or advanced technology, the company ABC’s revenue has decreased very drastically so much so that its unable to pay its creditors, loans and other financial obligations.

In this case, the external auditors will need to qualify Company ABC’s financial statement pertaining to it going concern.

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Financial Accounting

 
 

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