Meaning and definition of going concern
Going concern refers to a term for a company which holds resources required to continue with operations indefinitely. If a company is not a “going concern”, it indicates that the company has gone bankrupt. The term is also referred as “Going Concern Value.” The ‘going concern’ concept presumes that the business will exist long enough for all the assets of the business are utilized to the fullest.
As explained by Investopedia, the “Going concern” concept indicates a company’s capability of making sufficient money to stay afloat or avoid bankruptcy. For instance, various dotcoms are no longer “going concern” companies.
Importance of going concern
In the present day economic conditions, many additional annual accounts than ever before are expected to contain disclosures associated with “Going Concern.” It is, therefore, essential for investors and others involved in the business world to not jump to the wrong conclusions related to these disclosures. Doing this could weaken business confidence even more thus worsening the overall economic situation.
“Going concern”, in accounting, is the director’s responsibility to check whether the assumption is apt while preparing financial statements.
The financial statements are prepared on the assumption that the company is ‘going concern’. This implies that it will continue to operate in the foreseeable future. Moreover, it is also believed to be capable of realizing assets in addition to discharging liabilities in the normal course of operations.
Additionally, the company’s auditor should essentially consider whether the use of “going concern” assumption is apposite, and whether material uncertainties exist about the capability of the firm to continue operations as a “going concern” that are required to be disclosed in the financial statements. The auditor of a company considers these types of items as negative trends in operating results, loan defaults, and denial of trade credit from suppliers in taking decisions about a substantial ‘going concern.’An auditor concluding about the existence of substantial doubt regarding the aptness of the going concern assumption needs to issue an opinion reflecting this. A bespoke opinion on apt disclosure about the risks and doubts in addition to a qualified opinion if appropriate disclosures are not made, are referred as “going concern” opinions.