Going Concern - Definition of The 'going Concern' Concept

Definition of The 'going Concern' Concept

The going concern assumption is universally understood and accepted by accounting professionals, however it has never been formally incorporated into U.S GAAP. In October 2008, FASB issued an Exposure Draft called, going concern. It discusses the following possible pronouncements for the going concern:

• Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP

• The time horizon over which management would evaluate the entity’s ability to meet its obligations

• The type of information that management should consider in evaluating the entity’s ability to meet its obligations

• The effect of subsequent events on management’s evaluation of the entity’s ability to meet its obligations

• Whether to provide guidance on the liquidation basis of accounting .

A current definition of the going concern assumption can be found in the AICPA Statement on Auditing Standards No.1 Codification of Auditing Standards and Procedures, Section 341, “ The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern” (AU Section 341) The 'going concern' concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. Utilized assets means obtaining the complete benefit from their earning potential. (i.e. if you recently purchased equipment costing $5,000 that had 5 years of productive/useful life, then under the going concern assumption, the accountant would only write off one year's value $1,000 (1/5th) this year, leaving $4,000 to be treated as a fixed asset with future economic value for the business)