A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two). The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations. Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting (Financial Accounting Standards Board, 2014).
Definition The going concern assumption is universally understood and accepted by accounting professionals; however, it has never been formally incorporated into U.S. GAAP. In October 2008, FASB issued an Exposure Draft called "Going Concern." It discusses the following possible pronouncements for the going concern:
Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP The time horizon over which management would evaluate the entity's ability to meet its obligations The type of information that management should consider in evaluating the entity's ability to meet its obligations The effect of subsequent events on management's evaluation of the entity's ability to meet its obligations Whether to provide guidance on the liquidation basis of accounting A current definition of the going concern assumption can be found in the AICPA Statement on Auditing Standards No.1 Codification of Auditing Standards and Procedures, Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern” (AU Section 341). The "going concern" concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. Utilized assets means obtaining the complete benefit from their earning potential (i.e. if you recently purchased equipment costing $5,000 that had 5 years of productive/useful life, then under the going concern assumption, the accountant would only write off one year's value $1,000 (1/5th) this year, leaving $4,000 to be treated as a fixed asset with future economic value for the business). In the UK and Republic of Ireland, the Financial Reporting Standards define that: "An entity is a going concern unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so." These also define that: "In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, 12 months from the date when the financial statements are authorised for issue." This is intended to set a very high threshold for not reporting as a going concern, and the reporting standards allow for accounts to be published on a going concern basis, with appropriate disclosures, where "significant judgement" was needed to reach the conclusion that the going concern was appropriate or where "material uncertainty related to going concern" exists. An explicit statement is also required that accounts have been prepared on a going concern basis.
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