What Does Going Concern Mean?
A going concern is a business that is expected
to continue to operate for the foreseeable future—which, for accounting
purposes, is typically considered to be a period of at least twelve months from
the date of the audit of its financial statements. A declaration that a company
is a 'going concern' typically means that the business has the resources and
ability to continue normal operations and meet all of its obligations and that
there are no conditions that, when considered in aggregate, create substantial
doubt about its ability to do so.
Divestopedia Explains Going Concern
The going concern principle is fundamental in the world of accounting and is one of the underlying principles of the balance sheet. If a company is a going concern, it is justified in deferring the recognition of certain obligations that appear on the balance sheet, such as accounts payable. An auditor typically determines whether a company is a going concern by evaluating a number of factors, including industry conditions, the company’s operating results and financial position, and any legal concerns, among others. These are usually analyzed over a period of the next 12 months, which is typically the period until the company’s next audit.
Conditions that suggest a company may not be a going concern include sustained negative trends in operating results, loan defaults, lawsuits against the company in question, or the denial of credit by any of the company’s suppliers. Being deemed not to be a going concern can have serious ramifications for a company as its assets may be declared to be impaired and need to be written-down and/or certain obligations may need to be recognized as immediately due and payable. Ultimately, a business that is deemed not to be a going concern may be forced into a liquidation process or a bankruptcy filing.