Going Concern Concept

Going concern concept is a simple but very important financial accounting principle which stipulates the basis on which financial statements are prepared depending on the likelihood of the company continuing its normal course of business.

General purpose financial statements are prepared assuming that the company can and will continue its business in the foreseeable future. If the company is not expected to continue operations i.e. it is required (or reasonably expected) to wind up, its financial statements are prepared using break-up basis. Foreseeable future normally means at least one year.

The assumption that a business is expected to continue in future affects the timing, nature and amount on which accounting transactions are recorded. For example, one criteria for classification of assets and liabilities into current and non-current is whether they are realized/settled within normal course of business. In a non-going concern basis, income, expenses, assets, liabilities and equity are recorded at values that reflect the winding up of business, i.e. assets are recognized at values they are expected to fetch if sold right away, etc.

Management is required to assess at the date of financial statements whether a business is a going concern. Some accounting frameworks require management to disclose their assessment of going concern. Indicators that jeopardize the going concern status of a business include: (a) situation where liabilities exceed assets, (b) default of a loan(s), (c) tax penalties, heavy fines, etc., (d) very adverse regulations, (e) negative cash flows, (f) extremely adverse legal claims, etc.

The auditors of the company are required to analyze the going concern status of a business.

Going concern concept is closely linked with business entity concept, materiality concept and historical cost concept. For example, in assessing going concern, a business is looked at in isolation of its owners, etc. (in line with entity concept); and only material reasons affect the likelihood of continuing operations (in line with materiality concept), etc.


In the following examples, identify if the company should prepare its financial statements on a going concern basis or a non-going concern basis:


Written by Obaidullah Jan, ACA, CFA