Going Concern

Financial statements are normally prepared on a going concern basis. Assets are carried at values that make sense for a continuing business, and liabilities are shown as falling due in the usual course. If closure is likely, that basis no longer fits, and assets may have to be valued as in a forced sale. Directors assess the assumption when approving accounts, looking at cash forecasts, debt maturities, covenants and likely trading. Where doubt exists, it must be disclosed, and in serious cases the accounts are drawn up on another basis. External auditors judge whether management's assessment is reasonable and whether the disclosure is adequate. They may add an explanatory paragraph to their opinion when a material uncertainty exists. The period looked at is commonly at least twelve months, but the starting date and exact rules differ between accounting frameworks. Lenders, suppliers and investors read a going concern warning as a sign that survival is in doubt.

A regional airline has loans of 200 million falling due in eight months and no agreed refinancing. Passenger numbers are below plan. The directors review cash forecasts and conclude that survival depends on a lender extending the loans. They disclose a material uncertainty, and the auditor includes a paragraph drawing attention to it.