What does 'Going Concern' mean
Going concern is an accounting term for a company that has the resources needed to continue to operate indefinitely until a company provides evidence to the contrary, and this term also refers to a company's ability to make enough money to stay afloat or avoid bankruptcy. If a business is not a going concern, it means the company has gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.
BREAKING DOWN 'Going Concern'
Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets until a more appropriate time, such as in an annual report, as opposed to quarterly earnings. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.
Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything. Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses or shifts to other products.
Certain red flags may appear on financial statements of publicly traded companies that may indicate a business may not be a going concern sometime in the future. Listing of long-term assets normally does not appear in a company's quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets sometime in the near future.
The inability of a firm to meet its obligations without substantial restructuring or selling of assets may also indicate a company is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them at a later date.
Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board (FASB) determined financial statements should reveal the conditions that led to an entity's substantial doubt it can continue as a going concern. Statements should also show management's interpretation of the conditions and the plans of management moving forward.
Evaluation of Conditions
In general, an auditor examines a company's financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company and denial of credit by suppliers.