AccountingWEB.co.uk guide to the audit of going concern

Steve Collings explains the regulations relating to the going concern presumption and where it applies when conducting audits.

There has been a lot in the accounting press lately about the fundamental importance of the going concern presumption – so what is all the fuss about?

During times of economic difficulty, such as recession, an entity’s exposure to collapse is generally higher than in times of economic boom (the housing market is a prime example). If the directors of a company consider it appropriate to cease trading or liquidate the company, clearly the company will not be a going concern and the financial statements should not be prepared on a going concern basis. Instead, ‘break up’ values should be used – this concept is emphasised in FRS 21 ‘Events After the Balance Sheet Date’ at paragraph 14, which states:

‘An entity shall not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or to cease trading or that it has no realistic alternative but to do so.’

Break up values cannot generally be used for an entity where the going concern basis is appropriate because such values ordinarily do not give relevant information to users who are seeking to assess the entity’s financial performance.

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