Going-Concern Value Defined, How It Works, Example

An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party. The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.

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If management refuse to make, or extend, an assessment of going concern the auditor will consider the implications for the report. In both cases a paragraph explaining the basis for the qualified or adverse opinion will be included after the opinion paragraph and the opinion paragraph will be qualified ‘except for’ or express an adverse opinion. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, personal finance education, top-rated podcasts, and non-profit The Motley Fool Foundation. KPMG handbooks that include discussion and analysis of significant issues for professionals in financial reporting.

A copy of 11 Financial’s current written disclosure statement discussing 11 Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – or from 11 Financial upon written request. When using the going concern method, businesses can step up to their profits or losses by transfers to equity account. If the net income is zero or negative, it may be better for a company not to report any figures at all.

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The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations. If management conclude that the entity has no alternative but to liquidate or curtail materially the scale of its operations, the going concern basis cannot be used and the financial statements must be prepared on a different basis (such as the ‘break-up’ basis). If the auditor or management deems it unlikely that the business will be able to meet its obligations over the next year, the next step is evaluating the management's plan. In this step, the auditor must determine whether it is likely that the plan will be implemented on time and whether the plan is sufficient to save the company. Going concern is an accounting term used to identify whether a company is likely to survive the next year.

Many candidates fall into the trap of relying on ‘discussions with management/directors’ and ‘obtaining a written representation’. Similarly ISA 580, Written Representations recognises that while written representations do provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. For private companies, outside investors may look to unload their shares to wash their hands of the company at any price possible, especially if there are legal problems. This will include a business valuation to attempt to value the company as a going concern and to value the assets at liquidation value. This may not actually hurt the stock price that much since auditors usually will only make a negative going concern determination when there have been problems for a while.

Mitigation of a qualified opinion

1. 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.
2. Under the going concern principle, the company is assumed to sustain operations, so the value of its assets (and capacity for value-creation) is expected to endure into the future.
3. A company may not be a going concern for a number of reasons, and management must disclose the reason why.
4. The valuation of companies in need of restructuring values a company as a collection of assets, which serves as the basis of the liquidation value.
5. In order to avoid the entity’s credit rating suffering any further decline, the directors have refused to make disclosures in the financial statements and have prepared the financial statements for the year ended 31 March 20X2 on the going concern basis.

Companies that are not a going concern may not have enough money to survive, and this fact must be publicly disclosed when an auditor audits their financial statements. A company may not be a going concern for a number of reasons, and management must disclose the reason why. Usually, liquidation value is applied when investors feel a company no longer has value as a going concern, and they want to know how much they can get by selling off the company’s tangible assets and such of its intangible assets as can be sold, such as IP. A company or investor that is acquiring a company may compare that company’s going-concern value to its liquidation value in order to decide whether it’s financially worthwhile to continue operating the company, or whether it is more profitable to liquidate it.

Candidates should generate the audit procedures specifically from information contained in the scenario to demonstrate application skills Jasmine Co in the September/December 2018 Sample exam demonstrates this approach. Get step-by-step guidance on how to invest in Tesla stock and learn the ins and outs of this electric vehicle company. Let's go over some red flags you can look for to see if there could be a bankruptcy in the company's future. The going concern assumption – i.e. the company will remain in existence indefinitely – comes with broad implications on corporate valuation, as one might reasonably expect. In the context of corporate valuation, companies can be valued on either a going concern basis or a liquidation basis. In the absence of the going concern assumption, companies going concern concept meaning would be required to recognize asset values under the implicit assumption of impending liquidation.

If the plan isn't good enough, liquidation principles must be applied to the reporting of all assets. It is then assumed that the company will not be a going concern, and the assets will be liquidated to pay off the debts. By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash. Even if the company’s future is questionable and its status as a going concern appears to be in question – e.g. there are potential catalysts that could raise significant concerns – the company’s financials should still be prepared on a going concern basis. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing.

Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable. This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value. A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business.