Lecture Video 7
Lecture 7: The Going Concern Basis
The going concern basis; it’s very important that we understand this is an underlying assumption. This means that underneath the foundation of the financial statements, there is an assumption that the company is a going concern. When we use the word ‘concern’ here, understand that it really is just another way of saying business. So people talk about the fact that we have a business concern; it is a marketing concern or an accounting concern. So to a large extent the word concern just means business.
That makes it a little bit easier. When we look at going concern, all we're saying really is that your business is a going business. Going meaning it's a continuing business, it's going to carry on. And all we're trying to say is that your financial statements are drawn up on the assumption that your business is going to continue going.
If your business is not going to continue going, you can imagine that there are a few people who would like to know that. So the entity or business assumes that they'll be able to continue operating in the foreseeable future; that you're going to continue operating. We can't say that this is indefinite though. I can't expect you to tell me that your business is going to carry on forever, because you don't know that.
So in terms of your IFRS; in terms of your financials - we talk about the foreseeable future. And we interpret that as 12 months, which means we know you can't tell the future, but you assume that for the next 12 months your business is going to continue operating. So management has to make a little bit of an assessment of whether or not they believe that they will be able to continue operating for the next twelve months.
You can imagine if you were the bank, or you were an investor; if someone came to you and said, “I'd like to take a loan out for my business.” Would you imagine that it would be useful for you to know if their business was going to come crashing down in six months’ time? Of course!
So we say that the financial statements are drawn up on the assumption that the company is a going concern. If it is not a going concern, then the financial statements must reflect this and the users must be told it is not a going concern.
So when we say ‘continue operating’ you'll see they define that as – “The ability to realise assets. In other words, that your assets will generate income for you and settle liabilities in a normal course of business.”
The difference being normal course of business. And if your company is not a going concern, it would be liquidated. You would pay your liabilities off, and you would realise your assets under liquidation. So a going concern is going to be something where we assume that the company continues operating. It's able to pay its debts as they fall due, and they're going to make their money by selling the goods that they make and buying more goods and selling those, and so the business continues rather than your business closing down and having to liquidate your assets.
So the going concern basis - it's something that all of your financial statements are drawn up; it is an underlying assumption, and all it says is if you're not a going concern, if your business is not going to continue operating in the foreseeable future, then it's probably a pretty good thing that you put something in financial statements and let them know.
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