What is Going Concern?
The assumption that the entity will continue operating for the foreseeable future.
What is Going Concern?
Going concern is the fundamental assumption that an entity will continue in operation for the foreseeable future and has neither the intention nor the necessity to liquidate or curtail materially the scale of its operations. It underpins the entire basis on which financial statements are prepared: assets are carried at cost less depreciation rather than at liquidation value, and liabilities are classified according to normal operating cycles. If the assumption fails, the basis of preparation itself must change.
At a glance
Also known as
Indicators
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Think of it like…
Think of pricing the contents of a house. If the family is staying, the furniture is worth what it does for them over years of use. If the house is being cleared tomorrow, the same furniture is worth whatever a buyer will pay this afternoon. Nothing about the furniture changed — only the assumption about the future did.
How Going Concern works
- Management assesses the assumption. Management evaluates the entity's ability to continue as a going concern over the period required by the framework and prepares the statements accordingly.
- The auditor evaluates that assessment. The auditor obtains sufficient appropriate evidence about the appropriateness of management's use of the assumption and remains alert throughout the audit.
- Identify events casting significant doubt. Financial indicators such as net liabilities and defaults, operating indicators such as loss of key management or markets, and other indicators such as pending litigation.
- Determine the reporting consequence. Adequate disclosure of a material uncertainty leads to an unmodified opinion with a specific section; inadequate disclosure or an inappropriate assumption leads to modification.
Reporting outcomes at a glance
- 1Assumption appropriate, no material uncertainty → unmodified opinion
- 2Material uncertainty exists and is adequately disclosed → unmodified opinion with a Material Uncertainty section
- 3Material uncertainty exists but is not adequately disclosed → qualified or adverse opinion
- 4Assumption itself is inappropriate → adverse opinion
- 5Management unwilling to make or extend its assessment → possible disclaimer
Where it shows up
- Asset valuation. Carrying amounts depend on continued use; abandoning the assumption forces a different measurement basis.
- Liability classification. Current and non-current classification rests on a normal operating cycle continuing.
- Audit reporting. Going concern is one of the most frequently examined determinants of the audit opinion.
- Loan covenant analysis. Breaches of covenants are classic financial indicators that trigger going concern evaluation.
Common mistakes
- Assuming that any doubt automatically requires a qualified opinion
- Confusing adequate disclosure of uncertainty with an inappropriate assumption
- Considering only financial indicators and ignoring operating and other indicators
- Forgetting that management's unwillingness to assess may itself lead to a disclaimer
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Talk to usDoes a material uncertainty always mean a modified opinion?
No. Where the uncertainty is adequately disclosed, the opinion remains unmodified and the auditor includes a separate Material Uncertainty Related to Going Concern section in the report.
Who is responsible for the going concern assessment?
Management makes the assessment; the auditor evaluates whether that assessment is appropriate and whether disclosure is adequate. The distinction is frequently examined.
What period does the assessment cover?
The period specified by the applicable financial reporting framework, with the auditor also considering events after that period that may cast doubt on the assumption.
Understanding Going Concern is the start. Using it in a question is the test.
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