At the end of the day, awareness of the risks that place the company’s future into doubt must be shared in financial reports with an objective explanation of management’s evaluation of the severity of the circumstances surrounding the company. The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan.

  • However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern.
  • For example, a company may have a profitable track record or prior success at refinancing.
  • If managers or auditors believe that a company is at risk of going bust within 12 months, they are required to formally express that doubt in their financial accounts.

Under the going concern principle, the company is assumed to sustain operations, so the value of its assets (and capacity for value-creation) is expected to endure into the future. The dreaded warning, usually buried in the fine print, often leads to sharp declines in a company’s stock price, angst for creditors and worries among employees. When your company is ready to go through a business valuation, there are three major approaches.

Use in risk management

According to the article, the transition from fossil fuels to clean energy in the United States, following President Joe Biden’s landmark climate law, faces unexpected hurdles. In this article, I’ll walk you through my mistake and explain why clean energy stocks are in such a bad spot. I’ll also explain why I wouldn’t touch Plug Power at these levels, despite the massive discount since I became bullish. If the accountant believes that an entity may no longer be a going concern, then this brings up the issue of whether its assets are impaired, which may call for the write-down of their carrying amount to their liquidation value.

However, the overall financial performance for 2023 has been negatively impacted by unprecedented supply challenges in the North American hydrogen network. As we can see below, while the company was able to keep net financial debt low, it heavily diluted shareholders, which contributed to its horrible stock price performance. With a working capital of $1.3 billion, including $110.8 million in unrestricted cash, Plug Power acknowledged uncertainties about its ability to continue as a going concern within the next twelve months. The proposed requirements, such as limiting the $3-per-kilogram credit to hydrogen production operations powered by recent clean-power projects, are raising concerns about impeding the industry’s growth. According to a report by BNN Bloomberg, a leaked draft of the Treasury Department’s guidelines for claiming hydrogen production tax credits under President Biden’s climate law has caused concern among the hydrogen industry.

Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board determined financial statements should reveal the conditions that support an entity’s substantial doubt that it can continue as a going concern. Statements should also show management’s interpretation of the conditions and management’s future plans. The concept of going concern is particularly relevant in times of economic difficulties and in some situations management may determine that a profitable company may not be a going concern, for example because of significant cash flow difficulties. It is important that candidates understand that it is the responsibility of management to make an assessment of whether the use of the going concern basis of accounting is appropriate, or not, when they are preparing the financial statements. Management may have a history of successful refinancing or carrying out other plans.

Related Stocks

I added to my favorite railroads, I bought defense stocks, real estate dividend stocks, energy stocks, and so much more. If there is an issue, the audit firm must qualify its audit report with a statement about the problem. Cash flow modelling needs to reflect any climate-related strategic plans approved by the board. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.

Management will need to assess whether the events or conditions identified, either individually or collectively, may cast significant doubt on the company’s ability to continue as a going concern. In severe cases, management will need to assess whether the going concern assumption is still appropriate as a basis for the preparation of the company’s financial statements. Also significant is the fact that if a business is determined to be a going concern that means that it can pay its liabilities and realize its assets.

Disclosure of a going concern qualification

The company’s auditor is the employee who must determine whether or not the company is still a going concern and they report their findings to the Board of Directors. The auditor is required to disclose any negative trends in the company’s business operations. Negative trends include such things as lower operating income, loan denials, loan defaults, repossession of assets, and more.

Our Services

If the auditor determines that the company is no longer a going concern, assets normally reported at cost on the balance sheet will instead be reported at a calculated liquidation value. Unlike IFRS Standards, the going concern assessment is performed for a finite period of 12 months from the date the financial statements are issued (or available to be issued for nonpublic entities). Known or knowable events beyond the look-forward period can be ignored in the going concern assessment, although disclosure of their potential effects may still be required by other standards. Impacts from a fall and winter COVID-19 surge may bring further uncertainty to many companies. Management should continually evaluate the effects of COVID-19 on the company’s going concern assessment, including information obtained after the reporting date and up to the date the financial statements are authorized for issuance. The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt.

A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business. If your business and its assets are worth about $5 million but similar companies have been sold in the $2-million range, you may lose money on the sale. Earning value approaches are the most popular means of business valuations, but that doesn’t mean it’s the right choice for you. In fact, a combination of these three methods may be the best way to get a fair and accurate value for your company. The best way to get the fairest valuation is to hire an experienced business valuator to advise you on the best methods of how to evaluate your business.

Related AccountingTools Courses

IFRS Standards do not prescribe how management should evaluate its plans to mitigate the effects of these events or conditions in the going concern assessment. Under Step 1, management determines whether events and conditions raise substantial doubt about the company’s ability to continue as a going concern. Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting (Financial Accounting Standards Board, 2014[1]).