Going concern is an accounting principle that assumes a business will continue to operate indefinitely. This means that the company is expected to use its assets for their intended purposes rather than liquidate them. If a business is not considered a going concern, it may be evaluated on a break-up basis, which assesses the immediate sale value of its assets, often resulting in lower valuations.
The going concern concept is primarily used in accounting and financial reporting. It is critical for auditors and accountants when preparing financial statements. If a company is deemed not to be a going concern, it may trigger additional disclosures or necessitate different accounting treatments. This concept is relevant in various legal areas, including corporate law and bankruptcy law, where the viability of a business impacts legal proceedings and obligations.
Here are a couple of examples of abatement:
Example 1: A retail company preparing its annual financial statements assesses its sales trends and market conditions. If it believes it can continue operating for at least the next year, it will report its finances under the going concern assumption.
Example 2: A manufacturing firm facing significant losses may be evaluated as a non-going concern if it cannot secure additional funding or restructure its debts, leading to a different valuation approach. (hypothetical example)
| Term | Definition | Key Differences |
|---|---|---|
| Going Concern | Assumes a business will continue operating indefinitely. | Focuses on ongoing operations and asset use. |
| Break-Up Basis | Values a business based on the liquidation of its assets. | Assumes the business will cease operations. |
If you are involved with a business that may not be a going concern, it's important to assess its financial health and seek professional advice. Consider using US Legal Forms' legal templates to help manage your business's financial documentation. If the situation is complex, consulting with a financial advisor or attorney may be necessary.
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It refers to the assumption that a business will continue to operate indefinitely and use its assets for their intended purposes.