Introduction
It is one of the important accounting principles and is the basis of many accounting requirements set out in either of generally accepted accounting principles or alternatively International financial reporting standards. The principle feature in relation to the going concern principle is that it establishes the perception of continuation of the operations of the organization with regard to the foreseeable future. Think for the moment if there is no such perception, would you go for investing in such organization? Definitely, there would be a big No. The non-compliance to the going concern principle has far-reaching implications for the organization.
Implications in case of absence of the Going concern
If you have a little experience of observing the annual report of any public company you would definitely observe a set pattern in relation to the preparation and presentation of the financial statements. This set pattern is valid only in the case when the going concern principle is valid for the specific organization. If there is the absence of the going concern principle in relation to the specific organization, then the preparation of the financial statements is not same as you have observed by accessing an annual report of the certain public company.
Liquidity order if Going concern holds no more
The financial statements of the concern for which going concern assumption does not hold anymore used to be prepared on the liquidation basis. For instance, in relation to the Balance sheet prepared in accordance with the liquidity order, cash is presented first, followed by such securities that have short-term maturities that is marketable securities. Subsequent to the cash and marketable securities, we will present accounts receivable and the inventory would be presented in last.
Adjustments to the carrying values Recognized in the financial statements
It is important to consider that when the going concern assumption holds no more, we have to write down the values of the assets, liabilities and the equity. Usually, the written down value to comply with the liquidation process are less than the carrying values already reported in the balance sheet.
Auditor and the Going Concern Principle
Auditors have precise focus if the going concern assumption holds true for the organization or not. They have designed procedures to establish the going concern of the specific organization. The reporting frameworks that is international financial reporting standards and GAAP do not discuss going concern much, however, they require the auditors to verify and establish if the going concern holds true or not. In the case, going concern does not hold true it will eventually result in the qualification of the financial statements.
There are indicators which may point out about the going concern assumption not holding for the specific organization. For instance, negative trends in relation to the operational activities and results and likewise there are numerous discontinued operations and product lines. Moreover, repeated loan restructuring or not complying with the loan repayment schedules can be another instance of the absence of the going concern.
Conclusion
The principle feature in relation to the going concern principle is that it establishes the perception of continuation of the operations of the organization with regard to the foreseeable future. If there is the absence of the going concern principle in relation to the specific organization, then the preparation of the financial statements is not same as you have observed by accessing an annual report of the certain public company. The financial statements are usually prepared on the liquidity basis and it implies that the organization is not able to operate in the long-term.
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