Going Concern – What does it mean and why does it matter?

What is Going Concern?

An entity’s financial statements are normally prepared on a going concern assumption. This means that the company is expected to continue operating for the ‘foreseeable future’, meaning, at least 12 months from the reporting date.

Going concern is a fundamental assumption in financial reporting. It assumes that the company has neither the intention nor the need to liquidate and cease its operations. This concept applies to a business as a whole, meaning that if a company closes a small business segment or discontinues one of its products, and continues with the others, it is still considered a going concern.

What if an entity is not a going concern?

A company can decide that it will not be operating for the foreseeable future. This can be due to bankruptcy, loss of a major client, legal action or even simply deciding to cease trading. In this case, the company will be liquidated, and the financial statements will be prepared on a break-up basis.

Key differences:

Going concern	Break-Up Basis
Assets recorded at cost or value in use – not forced sale value	Assets written down to net realisable value
Liabilities classified as current or non-current	Additional provisions recognised and debt may become immediately repayable

Failure to apply the correct basis or provide appropriate disclosure may result in material misstatement in the financial statements.

Management’s Responsibility

Management is responsible for assessing whether the entity can continue as a going concern. This involves judgement about uncertain future events and conditions. They must consider cash flow forecasts and liquidity position, trading performance and future projects, availability of financing, post year-end events, economic and industry conditions and other events and conditions.

Auditor’s Role

Auditors do not determine viability; they evaluate management’s assessment. Their responsibility is to obtain sufficient, appropriate audit evidence and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern. Procedures may include reviewing board and shareholder meeting minutes for financial concerns, challenging assumptions in forecasts, considering subsequent events, reviewing financing agreements and other matters deemed necessary to enable the auditor to conclude. The auditors will also be assessing the adequacy of disclosures presented in the financial statements and making appropriate reference in their auditor’s report, if deemed necessary. The auditors may also disagree with management’s assessment, and this may impact the auditors report, should management fail to remediate.  

Why Going Concern Matters to Stakeholders?

Going concern underpins confidence in a company’s future viability. An incorrect assessment can mislead users, inflate asset values, delay necessary restructuring and ultimately, result in collapse and loss of stakeholder trust.

The Going Concern assumption is fundamental to financial reporting. It affects measurement, disclosure and the auditor’s opinion. Careful assessment and transparent communication, improve the reliability of financial statements, supporting informed decision making and stakeholder confidence.

Get in Touch:

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Naomi Ellul

nellul@quazar.mt / +356 2388 4600