A going concern is a business presumed to continue operating and to meet its obligations as they come due. Financial statements built on that presumption are prepared under the going concern basis of accounting, and the presumption holds unless and until liquidation becomes imminent, at which point the statements move to the liquidation basis. The same two words also name something different in a business sale, where going concern value is a specific intangible asset with its own tax definition.
Where the Presumption Is Written Down
Both US audit rulebooks state the presumption before they state any duty. Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for a reasonable period of time, and a complete set of general purpose financial statements is prepared using the going concern basis of accounting unless the liquidation basis of accounting is appropriate (AICPA, AU-C section 570, paragraph .02).
The public company standard puts it as a default that stands until something contradicts it. Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary (PCAOB, AS 2415, paragraph .01).
Management tests that presumption itself, every period, before any auditor looks at it. In connection with preparing financial statements for each annual and interim reporting period, management evaluates whether conditions and events considered in the aggregate raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, or within one year after the date they are available to be issued when applicable (FASB, Accounting Standards Update 2014-15, paragraph 205-40-50-1). The mechanics of that evaluation, including the defined meanings of substantial doubt and probable and the treatment of management’s own rescue plans, are set out in solvency.
The Auditor’s Own Evaluation
The auditor does not inherit management’s conclusion. Each rulebook gives the auditor a separate evaluation, with its own window and its own reporting consequence, and the two differ on both. Which one applies depends on the client: the AICPA standard covers a non-issuer audit, which is most private company work, and the PCAOB standard covers an issuer, a company that reports to the SEC.
Non-Issuer Audits Under AU-C 570
The objectives are to obtain sufficient appropriate audit evidence regarding, and to conclude on, the appropriateness of management’s use of the going concern basis of accounting when relevant, to conclude whether substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time exists, to evaluate the possible financial statement effects including the adequacy of disclosure, and to report (AICPA, AU-C section 570, paragraph .10).
Reasonable period of time is a defined term rather than a matter of judgment. It is the period required by the applicable financial reporting framework or, if no such requirement exists, within one year after the date that the financial statements are issued, or within one year after the date they are available to be issued when applicable (AICPA, AU-C section 570, paragraph .11).
When substantial doubt remains after the auditor has considered the identified conditions or events and management’s plans, the report carries a separate section headed “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern” that draws attention to the note disclosing those conditions and plans and states that the auditor’s opinion is not modified with respect to the matter (AICPA, AU-C section 570, paragraph .24). The wording is constrained as well: the description should use terms consistent with those in the applicable financial reporting framework, and the auditor should not use conditional language concerning the existence of substantial doubt (AICPA, AU-C section 570, paragraph .25).
There is a harder outcome past that one. If the financial statements have been prepared using the going concern basis of accounting but the auditor judges that use inappropriate, the auditor should express an adverse opinion (AICPA, AU-C section 570, paragraph .23).
Issuer Audits Under PCAOB AS 2415
The window is anchored to a different date for a public company. The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (PCAOB, AS 2415, paragraph .02). That runs from the balance sheet date, not from the date the statements go out.
The report mechanics differ too. If substantial doubt remains, the audit report should include an explanatory paragraph, including an appropriate title, immediately following the opinion paragraph, and the conclusion should be expressed through the phrase “substantial doubt about its (the entity’s) ability to continue as a going concern” or similar wording that includes the terms substantial doubt and going concern (PCAOB, AS 2415, paragraph .12).
Neither standard turns the report into a forecast. The auditor is not responsible for predicting future conditions or events, and the absence of a reference to substantial doubt should not be viewed as providing assurance as to an entity’s ability to continue as a going concern (PCAOB, AS 2415, paragraph .04). The non-issuer standard reaches the same place: the auditor cannot predict such future conditions or events, so the absence of any reference cannot be viewed as a guarantee (AICPA, AU-C section 570, paragraph .08).
When the Statements Switch to the Liquidation Basis
The trigger is imminence, not doubt. An entity shall prepare financial statements in accordance with the requirements of Subtopic 205-30 when liquidation is imminent, unless the liquidation follows a plan for liquidation that was specified in the entity’s governing documents at the entity’s inception (FASB, Accounting Standards Update 2013-07, paragraph 205-30-25-1).
The standard defines imminent two ways, and remoteness is a condition of both. Liquidation is imminent when a plan for liquidation has been approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that either execution of the plan will be blocked by other parties or the entity will return from liquidation, or when a plan for liquidation is imposed by other forces, for example involuntary bankruptcy, and the likelihood is remote that the entity will return from liquidation (FASB, Accounting Standards Update 2013-07, paragraph 205-30-25-2).
The statements themselves change shape. At a minimum the entity prepares a statement of net assets in liquidation and a statement of changes in net assets in liquidation (FASB, Accounting Standards Update 2013-07, paragraph 205-30-45-1). The residual those statements present is the same subtraction defined in net assets, measured on different rules.
Measurement changes with the basis. Assets are measured to reflect the estimated amount of cash or other consideration the entity expects to collect in settling or disposing of those assets in carrying out its plan for liquidation, fair value is not to be presumed a good proxy for that amount across all assets, and costs and income the entity expects to incur or earn through the end of the liquidation are accrued once it has a reasonable basis for estimation (FASB, Accounting Standards Update 2013-07, paragraphs 205-30-30-1 and 205-30-25-7). What counts as an obligation on the other side of that subtraction is still the question settled in liabilities.
Going Concern Value, the Other Meaning
A CPA firm meets the phrase a second way, on a practice sale, and it is a different thing with a different authority behind it. Going concern value is the additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity, including the value attributable to the ability of a trade or business, or part of one, to continue functioning or generating income without interruption notwithstanding a change in ownership, and the value attributable to the immediate use or availability of an acquired trade or business, but not any of the intangibles described in any other provision of that same paragraph of the regulation (26 CFR 1.197-2(b)(2)).
Two of the intangibles that exclusion carves out are defined in the next two provisions of the same regulation. Workforce in place covers the composition of a workforce, the terms and conditions of employment whether contractual or otherwise, and any other value placed on employees or any of their attributes (26 CFR 1.197-2(b)(3)), and an information base covers business books and records, operating systems, and customer lists (26 CFR 1.197-2(b)(4)).
That is a line in a purchase price allocation, not a basis of accounting. In an applicable asset acquisition the consideration received for the assets is allocated among the assets acquired in the same manner as amounts are allocated under section 338(b)(5) (26 U.S. Code section 1060(a)). Where it lands in the class order, and what the label does to each side’s tax result, is worked through in what a buyer of an accounting practice is actually pricing.
What Going Concern Is Confused With
Three distinctions get tangled, and one sentence separates each.
Going concern is a reporting basis, solvency is a comparison of everything owned against everything owed, and liquidity is whether what is already cash or one step from it covers what falls due now; the statutory insolvency tests sit in solvency and the acid-test arithmetic in quick ratio.
Going concern is the presumption, while substantial doubt is the defined threshold that unseats it, and the threshold is met when conditions and events, considered in the aggregate, indicate it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued, rather than turning on a reader’s unease (FASB, Accounting Standards Update 2014-15, Master Glossary).
Going concern as an accounting concept decides which basis the statements are built on, while going concern value is an intangible asset priced in a sale, and a business having going concern value says nothing about whether its auditor identified substantial doubt.
Common Questions
A business the accounts assume will keep running and keep paying what it owes, rather than one being wound up. The assumption is not open ended, because it reaches only as far as the reasonable period of time the applicable standard defines.
Being a going concern is the ordinary state, so the question is usually about the report language. A going concern section in a non-issuer audit report states that the auditor’s opinion is not modified with respect to the matter, so on its own it flags the entity’s condition rather than a defect in the accounts. The opinion does change when the going concern disclosure itself is inadequate, which calls for a qualified or adverse opinion (AICPA, AU-C section 570, paragraph .26). It is also not a prediction of failure, since neither standard makes the auditor responsible for predicting future conditions or events.
Because the phrase names the condition being assumed, a concern that is still going rather than one being wound up. It does double duty in both rulebooks, as a noun for the entity and as the label for the basis the statements are prepared on, which is where the phrase going concern basis of accounting comes from.
It is the presumption that the entity will continue operating, and it is what keeps the ordinary measurement rules in force. Once liquidation is imminent the assumption ends, and the liquidation basis is applied prospectively from the day liquidation becomes imminent, with the initial statement of changes in net assets in liquidation presenting only changes that occurred since that day (FASB, Accounting Standards Update 2013-07, paragraph 205-30-45-2).
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