Going concern

A firm is seen as a ‘going concern’ if its auditors believe it will stay in business for the ‘foreseeable future’ (as a rule of thumb, this is at least 12 months after its balance-sheet date). This is important because if you remove that assumption, certain standard balance-sheet classifications make no sense.

For example, you can’t have assets listed as ‘fixed’ (longterm) or liabilities classified as ‘falling due after more than one year’ if the firm is about to go bust. Where going concern is in doubt, accounts may be prepared on a ‘break-up’ basis.This means assets and liabilities in the balance sheet are reclassified as short term and written down to their ‘fire sale’ values on the assumption that the business will soon cease.