Why The Going Concern Concept Is Important In Accounting

Why The Going Concern Concept Is Important In Accounting

The Going Concern concept guides accounting services providers in Singapore to treat businesses as though they will continue to operate into perpetuity. Or the company is deemed to continue in its operations in the foreseeable future and management does not have the need to liquidate its company, or disrupt or stop its operations. It’s an assumption that a business will continue to realise its assets and meet its obligations in the ordinary course of operations. The going concern concept is vital to the running of the entity and its stakeholders including trading partners, shareholders, lenders, and regulatory agencies.

Importance to the Business

Accounting services in Singapore follow the Singapore Financial Reporting Standards which embraces the going concern principle. Without this principle, businesses would not have the ability to make prepayments or accrue expenses, after all the company might not be there long enough to realise future expenses.

Similarly, the concepts of depreciating and amortising assets are hinged on the idea that the business can continue its operations well into short-term future. In the same way, assets are reported in the balance sheet as historical costs. However, disregarding the going concern would mean that the entity would take a liquidation approach of valuing the assets (factoring in the depreciation). All assets would be deemed as current assets.

Importance to Shareholders and Investors

The concept of going concern is crucial to shareholders because it demonstrates the stability of the entity. This assumption can affect the stock price of the business and their ability to raise capital or draw in more investors.

Disregarding the going concern concept would mean that investing in company stocks would be pointless since the entity would be liquidised in the following financial period and investors compensated.

Importance to Lenders

Lenders also look keenly at the opinion of the accounting service in Singapore like auditors on an entity’s going concern qualification. If there are any doubts about a company’s going concern state, banks, and other financial institutions would not extend long-term financing thus the company would be unable to grow.

Finally, Importance to Regulators

The interests of regulators of accounting services in Singapore concerning a company’s going concern status are wide-ranging. They are the watchdogs for other stakeholders and ensure high standards in financial reporting.

Singaporean companies are expected to prepare their financial statements and report their positions according to the Singapore Financial Reporting Standards.

The Accounting and Corporate Regulatory Authority (ACRA) maintains the prerogative of monitoring and enforcement of compliance with accounting standards. However, it is the Accounting Standards Council (ASC) that has the statutory authority of setting accounting standards.

Beginning 15 December 2016, in order to enhance transparency, the ASC directed that all audit reports will contain explicit statements on the responsibilities of management in evaluating the entity’s ability to continue as a going concern, whether the use of the term going concern is appropriate and to disclose any matters that may affect the use of the term going concern.

The ASC further imposed on auditors the responsibility of assessing and appropriateness of management’s conclusion of going concern and report whether there’s material uncertainty existing in as far as regarding the entity as a going concern.

These demands underpin the importance of the going concern concept.

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