Going concern

What it means

Going concern is the assumption that the company will keep operating for at least twelve months after the closing date. The whole basis of measurement in the financial statements rests on it.

If the assumption fails, assets are measured differently: not by their use in operations but by what they would fetch on sale. The gap is dramatic for inventory and specialised machinery.

The assumption is not judged at the balance sheet date alone. Events up to the day the statements are prepared count too: if a key customer leaves or the bank terminates a loan after year end, the statements for the past year must reflect it even though it happened in the new year. It is not management’s impression but a judgement backed by concrete figures and contracts.

How it works in practice

At closing, liquidity, loan maturities, lost equity and dependence on one customer are assessed. Where the assumption is at risk, it is disclosed in the notes together with the plan.

In an audit it is a central topic. The auditor asks management for a written plan and supporting evidence: a funding commitment, contracts, parent company support.

In a small s. r. o. without an auditor the director makes the assessment, partly by checking whether the company is in crisis under the Commercial Code. When preparing the statements we therefore give the director a calculation of equity against liabilities and flag it if the company is nearing the line beyond which the law restricts certain payments to shareholders.

What to watch out for

Staying quiet does not pay. If the company is in insolvency a year later and the notes said nothing, the director’s liability is squarely in question and an insurer may decline cover.

If the shareholders have already decided to wind the company up, statements prepared as for a normal going business are wrong. Entering liquidation means extraordinary statements and assets measured at what they would fetch. Miss it and the shareholders are shown a liquidation surplus that will never actually arrive, and money gets distributed on the strength of it.