This paper will briefly summarize the main points of the proposed statement by the FASB. Org. the organization recently released a Current Exposure Draft and it is going to be the basis of this paper in the discussion of the Going Concern principle and its implications on a company. The findings of the paper on the principle are later going to be used to provide solutions for the FASB.org by proposing a number of changes that can be of benefits to the company.
Key words; going concern, balance sheets, financial performance
The going concern concept in business is an assumption that that the premises will continue existing in the near future. The concept is one of the most essential foundations of financial accounting in most firms. Generally, the concept indicates that the company’s balance sheet should be able to reflect the value of that firm as if it were to exist for a loner time than the foreseeable future. Accountants usually utilize this concept so that it becomes possible for them to prepare financial reports that are realistic (Venuti, 2004). Without the principle of going concern, most accountants would be forced to write off all the company assets in the current time include those assets that are considered long- term that still have a benefit economically for the periods in the future. The going concern concept, therefore, is a product of the desire by stakeholders to come up with financial statements that reflect accurately the performance in finance of a firm’s short and long- term periods. It, hence, helps accountants to allocate revenues and costs that cover a number of reporting periods (Ellingsen & Fagan, 1989).
Summary of Main Points of the FASB.org Report
The main purpose of the statement by the FASB.org was to offer guidance to evaluate the reporting ability of an entity to go on as a going concern. The report argues that during the preparation of financial statements, the management has to be able to assess the ability of the entity that is reporting to continue as a going concern. The statement also argued that during the assessment of whether the going concern principle is appropriate, the management must take into account all the information that is available about the future, which is not less but not limited to 12 months.
The management, as the statement points out, may identify information about particular events or conditions that show that there could be some significant doubt about the ability of the entity to continue as a going concern. After this, the management must consider a number of tactics for dealing with the negative impacts of those events and conditions, and decide whether those tactics will be effective in mitigating the impacts, and whether they can be implemented effectively. Also the report indicates that the management must disclose uncertainties noticed about conditions or events that might show some doubt on the ability of the entity to continue as a going concern. Also, a reporting entity must disclose the facts incase when they do not prepare the financial statements on a basis of going concern, in addition to providing a basis on which the statements were prepared and why the entity was not treated as a going concern.
A going concern, as already indicated, is the ability for a company or a firm to continue functioning as an entity of business without facing the threat of liquidation in the foreseeable future. It is usually the responsibility of the management to assess and find out whether the going concern assumption of the entity is appropriate when it comes to preparing the financial reports of the company (Bedard & Chi, 1993). It is the responsibility of the company to disclose in its financial report’s notes, the factors that might endanger the position of the company as a going concern. The idea of determining whether a company can survive a going concern is difficult to discern. An auditor can give a firm a clean going concern only for the company to undergo liquidation within the following months. Another company’s going concern might be declared at the end of the financial year, but the company might surprise everyone when it does not get liquidated or when it does not go bankrupt. Surviving a going concern, therefore, is a challenging topic for many companies. However, with the right auditors, the company can get the right opinions about their going concerns and make the appropriate changes or improvements (International Auditing Practices Committee, 1999).
Another current assumption closely related but slightly different to going concern has to do with the company law. This aspect of going concern mainly affects the company’s directors and is slightly different from the going concern principle in accounting. Corporation laws usually require the company directors to make a declaration that their firms continue to show the aspect of going concern. This is to mean that the directors have a profound belief that their business has the ability to pay its bills as they come. The only similarity with the going concern assumption is that the directors are required to disclose to the stakeholders it the financial statement notes if there are any factors present that might affect the existence of the company as a going concern (Geiger & Raghunandan, 2002).
There are various reasons why this new standard might be more effective than the traditional going concern principle. One of the advantages it imposes on the company is that the requirement by corporate law for a company’s directors to declare the ability for a company to pay its bills is evidence enough that the company is a going concern and that if it does face any challenges, the notes in the financial statement will review them. This is beneficial because one knows what has been declared is the truth because it is supported by law. A disadvantage is that the concept does not allow for mistakes, and the directors have to be sure of their declarations or risk to be sued (Bruynseels & Willekens, 2006).
Though the FASB.org report follows the conceptual framework of this current theory, it is clear that it is not bound by corporate law in any way in its declaration of the company’s financial statement. As a result, it is possible that a declaration made by the management might be biased because there is no risk of being sued in case the results of the company do not match the declarations made of the financial status of the company (Arnold et al., 2000). As a result, I would propose that the company makes amendments to the theory they use to incorporate entities such as corporate law to ensure that what is declared is the truth.
Going concern is an extremely essential element in accounting, and, therefore, successful businesses. However, it should be realized that the application of the principle might not be as straightforward as its definition, and that professional auditors must be involved in declaring the financial status of a company.
Arnold, V. et al. (2000). The effect of experience and complexity on order and recency bias in decision-making by professional accountants. Accounting & Finance, 40(2), 109-134.
Bedard, J. & Chi, M. (1993). Expertise in Auditing. Auditing: A Journal of Practice and Theory, 12 (2), 21-45.
Bruynseels, L. & Willekens, M. (2006). Strategic Actions and Going-Concern Audit Opinions. Working paper, Tilburg University.
Ellingsen, J & Fagan, P. (1989). SAS No. 59: How to evaluate going concern. Journal of Accountancy, 167 (1): 51- 7.
Geiger, M.A. & Raghunandan, K. (2002). Going-Concern opinions in the “new” legal environment. Accounting Horizons (American Accounting Association).
International Auditing Practices Committee. (1999). Going concern. International Standards on Auditing, 570. IFAC.
Venuti, E. K. (2004). The Going-Concern Assumption Revisited: Assessing a Company’s Future Viability. The CPA Journal, 40.
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