Going concern is an essential principal assumption in accounting. It is one of the fundamental assumptions in accounting on the basis of which financial statements are prepared. The assumption is that a business or other entity will be able to maintain operating for a period of time that is adequate to carry out its assurances, requirements, purposes, and so on. In other words, the company will not have to liquidate or be forced out of business in the probable future.
The inappropriateness of Going Concern –
(a) Deteriorating liquidity position of a company not backed by sufficient financing arrangements.
(b) High financial risk arising from increased gearing level rendering the company vulnerable to delays in payment of interest and loan principal.
(c) Significant trading losses being incurred for several years. Profitability of a company is essential for its survival in the long term.
(d) Aggressive growth strategy not backed by sufficient finance which ultimately leads to overtrading.
(e) The inability of the company to maintain liquidity ratios as defined in the loan covenants. The inability of a company to develop a new range of commercially successful products. Innovation is often said to be the key to the long-term stability of any company.
(f) Serious litigations faced by a company which does not have the financial strength to pay the possible settlement.