In business, a going concern is an entity that is expected to continue to operate in the near future, typically within the next 12 months. As a noun, the word concern is derived from an early 20th-century term that is synonymous with business. The going concern assumption usually is that the company will not go out of business or liquidate its assets anytime soon. It typically determines the fiscal health of the company, i.e. whether it is healthy enough to continue operations or it is ill enough to necessitate termination.
The significance of the concept is evident in the valuation of the assets of the business. If the company will not continue operation in the future, the basis of accounting to be used is the break-up value where the assets and liabilities are reported as net realizable value. This is the amount expected to be realized if the assets are put up for sale piecemeal.
For example, suppose ABC Company acquired a copier machine for $10,000 US Dollars (USD), and the estimated life of the machine is five years. Depreciation is computed based on the value of the machine divided by its estimated life, or $10,000 USD divided by five equals $2,000 USD per year. In a going concern, the value of the copier machine is reflected at $8,000 USD in the financial statements at the end of the first year.
There typically are two major parties involved in the assessment of a company: the company’s management or directors, and its auditors. The directors usually will determine if the assumption will be used for the financial statements report. A company must disclose in the form of notes to the financial statements if there are doubts as to the status of the company.
A company auditor can conduct a going concern audit to determine if the status is appropriate for the company and if there are valid reasons to believe otherwise, which should be disclosed in the financial statements. The auditor is required to provide a going concern opinion regarding his doubts of the status. He provides a modified opinion if the company reveals the doubts and risks, and a qualified opinion if it has not made admissions.
Any major creditor or a financier also may be required to make a going concern assessment depending on the factors that induce a reassessment on the status. Going concern accounting assumes that the company will not cease trading and that they will be able to realize assets and pay liabilities in the course of doing business. In order to continue, the business must generate enough income to fund its operations.