For any set of accounts, and regardless of who completes them, particular accounting principles must be followed.
One of the accounting principles that needs to be followed when producing a set of accounts is going concern, and both auditors and management need to be fully aware of what this means in practice.
What is going concern?
In accounting, going concern refers to a business that is not at risk of liquidation, and means that accounts are produced on the assumption that it will continue to operate into the foreseeable future.
Unless there is information to the contrary, accounts will be produced based on the belief that the company will be able to pay its debts. If a company is not a going concern, then it has gone into liquidation, or will very shortly.
Going concern in practice
The going concern principle can be used by accountants to determine how a company should deal with the sale of assets. A company is a going concern if the sale of its assets does not impair its ability to continue its operations into the future.
Some companies may need to sell off assets during a year. For example, a company may want to close a branch that is not performing as expected, even though the company as a whole is performing well. This is will not hinder its performance into the future.
However, a company that cannot survive unless it sells off a considerable amount of stock and assets, and is therefore unlikely to be able to continue, will not be a going concern, and the accounts will need to reflect this. In cases like this, assets would need to be liquidated and recorded at net realisable values.
The going concern principle means that recognition of certain expenses can justifiably be deferred, as it is presumed that the organisation will be in a position to realise them at a later date.
Deciding whether going concern is applicable
Both management and auditing professionals are involved in deciding whether the presumption of going concern is applicable. However, it is the responsibility of management to decide initially whether or not the entity should be considered as a going concern, taking into account a broad range of factors from cash flow to competition.
Auditors are then responsible for collecting sufficient evidence to support management’s decision, and concluding whether or not it is appropriate.