Accounting Principles – Going On Concern Concept
The going concern concept states that a business will continue with its operations for the foreseeable future. The concept assumes that the company won’t be forced to discontinue its operations or liquidate due to any reason.
A perfect example of implementation of such concept in accounting is the calculation of depreciation based on the anticipated economic life of the fixed asset rather than its current value. Note that businesses assume that they will operate indefinitely and they will use their assets until they are fully depreciated. Prepayment and accrual of expenses is another example of going on concern assumption. Businesses accrue expenses and prepay expenses because they intend to operate indefinitely.
Though there is an assumption that a company will operate indefinitely, this is not always the case. You must have seen and heard of companies that terminated their operations, merged with others, and more. This means that some businesses might not operate indefinitely. If your accountant believes that company might no longer be a going concern, this raises the issue of whether your business’s assets are impaired. Impairment of fixed assets calls for the write-down of the assets’ carrying value to their liquidation amount.
This means that the value of a business that is assumed to be a going concern is usually higher than its termination value. This is because a going concern entity can continue making profits for as long as it operates.
Auditors evaluate a business’s ability to continue operating as a going concern entity for a period not greater than 12 months. There are a few things they consider to determine if the business should continue operating. These include:
- Continued negative trends especially operating results
- Violation of loan agreements by the company
- The company being denied trade credit by its suppliers
- Any legal proceeding against the company that requires it to stop operating
- The company being subjected to long-term uneconomical commitments
Therefore, it’s important to keep your business operations clean and evade anything that might make an auditor hint that your business should not continue indefinitely. Besides, it’s possible for your business to minimize an auditor’s view of the business’s going concern status. One way of doing this is by having a third party guarantee your business’s debts. This will assure the auditor that your business will continue operating effectively for the next 12 months.
Alternatively, you can consider getting accounting services in Singapore so to also obtain some valuable insight on how changes in transaction arrangement can impact the financial statements.