# What Does Going Concern Mean?

> **Definition**
>
> A going concern is a business that is financially stable and is expected to continue operating indefinitely.

## What Is Going Concern?

"Going concern" is a commonly used term for a healthy business but it also is a core accounting principle.

In accounting, a company is either a going concern or is not financially viable. This determination, based on a study of the company's financials, is generally understood to be good for at least 12 months.

Thus, the label going concern indicates that a company is making enough money to stay afloat for the foreseeable future or until there is evidence to the contrary.

### Key Takeaways

*   If a company is a going concern, certain expenses and assets may be deferred in financial reports.
*   If a company is no longer a going concern, it must start reporting certain additional information in its financial statements.
*   Negative signals that a company is no longer a going concern include denial of credit, continuing losses, and potentially expensive lawsuits.
*   An auditor must insert a going concern opinion in the audit report if there are doubts about the financial viability of a company.

![Going Concern](https://www.investopedia.com/thmb/BOF4UISzIV-DEPbzG38lwA3N-Tc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/DDM_INV_going-concern_df-cb28a750027d4a229175b75e826a0721.jpg)

*An auditor can assess whether a company is a going concern and financially stable. — Investopedia / Eliana Rodgers*

## Understanding Going Concern

Accountants use going concern principles to decide what types of reporting must be recorded on a company's financial statements.

Companies that are going concerns may defer reporting [long-term assets](https://www.investopedia.com/terms/l/longtermassets.asp) at current value or liquidating value, and instead report them at cost.

Accountants who conclude that a company is a going concern generally believe the company is using its assets wisely and does not have to liquidate anything to meet its financial obligations.

Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products.

[Generally accepted accounting principles (GAAP)](https://www.investopedia.com/terms/g/gaap.asp) deal with the issue of going concern and its assessment. GAAP provides examples of the events and conditions that may indicate reason for substantial doubt that a company can continue to operate as a going concern.

According to GAAP guidance, disclosures must be made as soon as a conclusion of substantial doubt is reached.

## Red Flags that a Business Is Not a Going Concern

Certain [red flags](https://www.investopedia.com/terms/r/redflag.asp) can indicate that a business may not be a going concern in the near future.

*   **Long-term assets listed in a company's quarterly statements or as a balance sheet line item.** Neither normally appears when a company is healthy and may indicate that a company plans to sell these assets to raise money.
*   **The inability to meet financial obligations without substantial restructuring or asset sales.** If a company acquires assets during a time of restructuring, it may plan to resell them later.
*   **A one-time event.** A single substantial lawsuit, a default on a loan, or a defective product can jeopardize a company's future.
*   **Ongoing expenses that vastly outweigh revenue.** Liabilities that overwhelm revenue from operations can threaten a company's ability to make a profit.
*   **A large debt payment coming due that can't be met with existing financial resources.** Having to borrow money to pay creditors is a sign of trouble.
*   **Low liquidity ratios, high employee turnover, or decreasing market share.** Companies with these factors are more likely to have trouble and raise doubt about their going concern status.

> **Fast Fact**
>
> Companies can go bankrupt without ever having been identified as having a going concern issue.

## Going Concern Conditions

[Accounting standards](https://www.investopedia.com/terms/a/accounting-standard.asp) determine what a company must disclose on its financial statements if there are doubts about its ability to continue as a going concern.

The [Financial Accounting Standards Board](https://www.investopedia.com/terms/f/fasb.asp) requires that financial statements reveal the conditions that relate to a finding of substantial doubt.

The statements should also show management's interpretation of the conditions and its plans to mitigate them.

### Negative Trends

In general, an auditor who examines a company's financial statements seeks evidence that the company can continue as a going concern for one year following the time of an audit.

Conditions that lead to substantial doubt about the viability of a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.

For a company to be a going concern, it usually needs to be capable of surviving a significant debt restructuring or massive financing overhaul if necessary.

Therefore, it may be noted that companies that are not going concerns may need external financing, restructuring, or asset liquidation.

## Implications of a Negative Report

There are several implications of a negative audit report. First, the company will be seen as a poor investment opportunity. It represents a significantly higher level of risk than other companies.

A company that is not a going concern may be revalued at the request of investors, shareholders, or the board. This revaluation may be used to price the company for acquisition or to seek out a private investor.

Certain accounting measures must be taken to write down the value of the company on the business's financial reports.

One of the larger repercussions of not being a going concern is the credit challenge. The company's existing debts may be callable. New lenders are unlikely to issue new credit, at least at a reasonable interest rate.

The credit crunch can trickle down to suppliers who may be unwilling to sell raw materials or inventory goods on credit.

## Is a Going Concern Good or Bad?

A going concern is a company that is financially stable and, at the very least, is likely to survive for the next 12 months. That's good. A company in poor shape that is not seen as a going concern may not last for 12 more months. That's bad.

## Why Is Going Concern So Important?

A company that's a going concern can back up its financial health and has confidence in its potential for success and longevity. It can satisfy customers. Suppliers and vendors will do business with it. The company will be able to get credit if needed. Additionally, it can attract new investors.

## What Happens If a Company Is Not a Going Concern?

If a company is not a going concern, its management is required to disclose this fact and must provide the reasons for the negative conclusion.

## The Bottom Line

The term "going concern" defines a company as being financially stable. A finding that a company is not a going concern serves as a notice to its customers, investors, and suppliers that its future is in jeopardy.

> **Article Sources**
>
> 1.  KPMG. "[Going Concern: IFRS® Standards Compared to U.S. GAAP](https://kpmg.com/us/en/articles/2023/going-concern.html#:~:text=Under%20Step%201%2C%20management%20determines,such%20adverse%20events%20and%20conditions.)."
>     
> 2.  Financial Accounting Standards Board. "[Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern](https://fasb.org/page/ShowPdf?path=ASU%202014-15.pdf&title=UPDATE%20NO.%202014-15%E2%80%94PRESENTATION%20OF%20FINANCIAL%20STATEMENTS%E2%80%94GOING%20CONCERN%20%28SUBTOPIC%20205-40%29:%20DISCLOSURE)."
>     
> 3.  Deloitte. "[Going Concern — Key Considerations Related to Performing a Comprehensive Assessment](https://dart.deloitte.com/USDART/home/publications/archive/deloitte-publications/accounting-spotlight/2020/going-concern-assessment)."
>     
> 4.  PwC. "[US Financial Statement Presentation Guide: 24.5 Going Concern](https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financial_statement_/financial_statement___18_US/chapter_24_risks_and_US/245_going_concern_US.html)."