Going Concern Concept

Financial statements are prepared assuming that the company is a going concern which means that the company intends to continue its business and is able to do so.

The status of going concern is important because if the company is a going concern it has to follow the generally accepted accounting standards.

The auditors of the company determine whether the company is a going concern or not at the date of the financial statements.

Examples

  1. An oil and gas firm operating in Nigeria is stopped by a Nigerian court from carrying out operations in Nigeria. The firm is not a going concern in Nigeria, because it has to shut down.
  2. A nationalized refinery is in cash flows problems but the government of the country provided a guarantee to the refinery to help it out with all payments, the refinery is a going concern despite poor financial position.
  3. A bank is in serious financial troubles and the government is not willing to bail it out. The Board of Directors has passed a resolution to liquidate the business. The bank is not a going concern.
  4. A merchandising company has a current ratio below 0.5. A creditor $1,000,000 demanded payment which the company could not make. The creditor requested the court to liquidate the business and recover his debts and the court grants the order. The company is no longer a going concern.

Written by Obaidullah Jan, ACA, CFA