Going concern is a basic underlying assumption that is applied in all general purpose financial reporting frameworks. The assumption is that a company, or other entity, will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on. In many ways going concern is one of the most basic and easily understood accounting concepts but it can be quite difficult to apply. Yet, the integrity of the financial statements depends on the accurate application of this concept. The following is guidance from Canadian Accounting Standards for Private Enterprises (ASPE) with regards to going concern.
There is no stand along standard for the going concern assumption. Rather, the guidance for the application of the going concern assumption is included in Section 1000 Financial Statement Concepts as well as Section 1400 General Standards of Financial Statement
Financial statements are prepared on the assumption that the entity is a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations. Different bases of measurement may be appropriate when the entity is not expected to continue in operation for the foreseeable future.
Assessing the Entity’s Ability to Continue as a Going Concern
When preparing financial statements, management is required to make an assessment of the entity's ability to continue as a going concern. Financial statements are required to be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so (i.e. the entity is unable to carry out its commitments, obligations and objectives). Section 1400.08 provides guidance on the assessment of the going concern assumption.
In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting 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.
Different disclosure requirements apply depending on the situation. For instance, if the financial statements are not prepared on a going concern basis this fact must be disclosed as well as the details of the basis that is being applied and the reasons the entity is not regarded as a going concern. If the financial statements are prepared on a going concern basis but material uncertainties exist that casts significant doubt on the entity’s ability to continue as a going concern, then those uncertainties must be disclosed. The requirements are summarized in Section 1400.17-18.
When management is aware, in making its assessment of an entity's ability to continue as a going concern, of material uncertainties related to events or conditions that may cast significant doubt upon the entity'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 entity is not regarded as a going concern.
In some cases, the effect of a subsequent event may be so pervasive that the viability of the whole or a part of the business of the enterprise is brought into question. A rapid deterioration in operating results or financial position after the date of the financial statements may indicate a need to consider whether it is proper to use the going concern assumption.
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