Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. For instance, the value of fixed assets (PP&E) is recorded at their original historical cost and depreciated over their useful life, i.e. the expected number of years in which the fixed asset will continue to contribute positive economic value. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Management’s plan could include borrowing more money to kick the can down the road, selling assets or subsidiaries to raise cash, raising money through new capital contributions, or reducing or delaying planned expenses. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

The company will be required to write down the value of its assets if liquidation value is lower than the current value on the balance sheet. The write-down process includes taking a loss on the income statement, so net income already doing badly will get even worse. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. When an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business.

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However, market conditions have changed as a result of COVID-19 – e.g. financing may be significantly more difficult and more costly to obtain now. A negative judgment may also result in the breach of bank loan covenants or lead a debt rating firm to lower the rating on the company’s debt, making the cost of existing debt increase and/or preventing the company from obtaining additional debt financing. They can help business review their internal risk management along with other internal controls. 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.

• It follows that when this is not the case, a detailed analysis will be necessary, which likely includes robust cash flow forecasts and a review of existing and forthcoming financial obligations.
• It is essential that candidates preparing for the Audit and Assurance (AA) exam understand the respective responsibilities of auditors and management regarding going concern.
• 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.
• This means the 12-month period is a minimum and management needs to exercise judgment to determine the appropriate look-forward period under the circumstances.

Disclosures addressing these requirements may need to be expanded, with added focus on the company’s response to the effects of COVID-19. For example, the look-forward period for a company with a December 31, 20X0 reporting date is at least the 12 months ended December 31, 20X1, but it may need to be extended depending on the facts and circumstances. For example, if the company expects to lose a major customer in 15 months from the reporting date, it may be necessary to extend the look-forward period up to at least March 31, 20X2. KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation.

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Plummeting cash flow and ballooning debt can be obvious signs of trouble, but nonfinancial factors can also sink a business, like legal issues, changes in regulation or the resignation of a key executive. 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. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits. 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. In order for a company to be a going concern, it usually needs to be able to operate with a significant debt restructuring or massive financing overhaul. Therefore, it may be noted that companies that are not a going concern may need external financing, restructuring, asset liquidation, or be acquired by a more profitable entity.

Management will need to monitor the expected impacts on operations, forecasted cash flows, and debt covenants, with the primary focus being on whether the company will have sufficient liquidity to meet its financial obligations as they fall due. Going concern is an accounting term used to identify whether a company is likely to survive the next year. Companies that are not a going concern may not have enough money to survive, and this fact must be publicly disclosed when an auditor audits their 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. 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. Once this is done, the auditor must issue a “going concern opinion” which means that the entity has neither the intention (nor the need) to liquidate or curtail in any material way the scale of its operations. US GAAP includes a two-step process that first determines whether substantial doubt about the company’s ability to continue as a going concern is raised.

Determining the Going Concern of a Business:

Management’s assessment of going concern is in the spotlight because of COVID-19 and uncertainties involved. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work. In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients.

In this example it is clear that the going concern basis is inappropriate in the entity’s circumstances. The directors have no realistic alternative but to liquidate in order to raise funds to pay back the bank and the bank have already confirmed that they will commence legal proceedings to force the entity into selling off assets to raise finance to repay their borrowings. If the auditor concludes that the disclosures are inadequate, or if management have not made any disclosure at all and management refuse to remedy the situation, the opinion will be qualified or adverse. An important point to emphasise at the outset is that candidates are strongly advised not to use the ‘scattergun’ approach when it comes to deciding on the audit opinion to be expressed within the auditor’s report. This is where a candidate explores all possible options rather than  coming to a conclusion as to the auditor’s opinion, depending on the circumstances presented in the question. By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash.

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Usually, liquidation value is applied when investors feel a company no longer has value as a going concern, and they want to know how much they can get by selling off the company’s tangible assets and such of its intangible assets as can be sold, such as IP. A company or investor that is acquiring a company may compare that company’s going-concern value to its liquidation value in order to decide whether it’s financially worthwhile to continue operating the company, or whether it is more profitable to liquidate it. The assumptions used in the going concern assessment should be consistent with those used in other areas of the company’s financial statements, for example impairment of assets, liquidity risk disclosures, etc. The effects of COVID-19 are negatively affecting many companies’ financial performance and liquidity in some way.

However, in our view, there is no general dispensation from the measurement, recognition and disclosure requirements of the Standards in this case, and these requirements are applied in a manner appropriate to the circumstances. A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two).

If a company receives a negative audit and may not be a going concern, there are several implications. Companies that are not a going concern represent a significantly higher level of risk compared to other companies. There are also a number of quantifiable, measurable indicators that auditors use to measure going concern. Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern. Going concern is an example of conservatism where entities must take a less aggressive approach to financial reporting. Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything.

Is It Too Late to Buy Nvidia Stock?

That’s why growth investors are getting a solid deal on Nvidia stock right now, and they may not want to miss this opportunity, considering how fast the market for AI-focused graphics processing units (GPUs) is anticipated to grow in 2024 and beyond. At the same time, analysts are expecting the company’s earnings to jump to a whopping $12.30 per share in fiscal 2024, a 268% increase publication 537 installment sales over the previous year. Given the impressive growth that Nvidia is anticipated to clock, its forward-looking multiples are significantly cheaper than the trailing ones. Nvidia stock may seem expensive at first, given that it trades at 26 times sales and 63 times trailing earnings. But a more appealing picture emerges when we put the valuation in the context of the company’s growth.