Going Concern Disclosures
“Going concern” is an accounting term that refers to a company’s ability to continue operating in the foreseeable future, typically regarded as the next 12 months. When there is substantial doubt about a company’s ability to continue as a going concern, this needs to be disclosed in the company’s financial statements. This is known as a “going concern disclosure.”
This type of disclosure is essential for investors, lenders, and other stakeholders, as it provides important information about the financial health and long-term viability of the company.
The auditor’s report also includes a going concern assessment. If the auditors have concerns about the company’s viability, they will issue a “going concern opinion” which essentially warns that there is substantial doubt about the company’s ability to continue its operations in the near future. This can happen in situations where a company is facing severe financial difficulties, such as recurring operating losses, liquidity issues, legal problems, or other adverse factors.
On the other hand, the absence of a going concern opinion doesn’t necessarily mean the company is in excellent financial health. It only means that, based on the auditors’ assessment, the company is likely to keep operating for the foreseeable future.
As always, stakeholders should consider a wide range of factors when assessing a company’s financial health and long-term prospects, not just the going concern disclosure or opinion. It’s also a good practice to consult with financial advisors or professionals when making significant financial decisions.
Example of Going Concern Disclosures
Imagine there’s a company, we’ll call it ‘TechNova Inc.’, which has been facing considerable financial difficulties. It’s been posting consistent operating losses, has substantial debts, and a significant portion of its capital is tied up in a new product development that’s been delayed for multiple quarters.
Due to these factors, the management of TechNova Inc. has doubts about its ability to continue operations in the foreseeable future. As a result, in their annual financial statements, they include a going concern disclosure. This disclosure would explain the factors leading to these doubts, such as the operating losses, high debt levels, and delayed product launch.
Meanwhile, the company’s auditors also have similar concerns. In their audit report, they issue a ‘going concern opinion’, indicating that there is substantial doubt about TechNova Inc.’s ability to continue as a going concern. The auditors’ report would outline the reasons for this opinion, which would likely mirror the concerns raised by the company’s management.
These disclosures would serve as a warning to investors, lenders, and other stakeholders that TechNova Inc. is facing severe financial difficulties, and there’s a significant risk associated with the company’s future operations.
Remember, this is a simplified example and real-world situations can be far more complex. Different jurisdictions might have specific rules and regulations on how and when to disclose going concern issues, and professional advice should be sought when dealing with such situations.