Going Concern

When preparing financial statements, management shall make an assessment of an undertaking’s ability to continue as a going concern. Financial statements shall be prepared on a going-concern basis, unless management either intends to liquidate the undertaking or to cease trading, or has no realistic alternative but to do so.

EXAMPLE-going concern
Banks provide loans under specific conditions, including the financial performance of clients. A breach of these conditions may enable the bank to liquidate the client’s business. In these circumstances, unless the client can secure an alternative source of finance, financial statements should not be prepared on a going concern basis.

When management is aware of material uncertainties that may cast significant doubt upon the undertaking’s ability to continue as a going concern, those uncertainties shall be disclosed.

When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared, and the reason why the undertaking is not regarded as a going concern.

In assessing whether the going-concern assumption is appropriate, management takes into account all available information about the future, which is at least twelve months from the end of the reporting period.

EXAMPLE-going concern
Management reviews its budgets to identify times when cash flows will be under pressure. It reviews its credit lines to ensure that sufficient funds will be available to cover any anticipated shortfalls. It arranges further lines of credit, if necessary. Having done this, it can produce accounts on a going-concern basis.

When an undertaking has a history of profitable operations, and ready access to financial resources, a conclusion that the going-concern basis is appropriate may be reached without detailed analysis.

In other cases, management may need to consider a wide range of factors, relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing, before it can satisfy itself that the going-concern basis is appropriate