Going concern is a fundamental accounting concept that refers to the assumption that a business entity will continue to operate in the foreseeable future without the need for liquidation or bankruptcy. It assumes that a company will remain solvent and able to meet its financial obligations. The going concern concept is important in financial reporting because it affects how a company's financial statements are prepared. If a company is considered a going concern, its financial statements will reflect the assumption that the company will continue to operate in the future. If a company is not considered a going concern, its financial statements will reflect the assumption that the company will be liquidated or will cease operations.
There are several factors that are considered when determining whether a company is a going concern or not. These factors include the company's current financial position, its ability to generate sufficient cash flows to meet its obligations, its access to credit and capital markets, and its overall operating and financial performance. Other factors that may impact a company's going concern status include changes in industry trends, changes in regulatory environments, and changes in economic conditions.
If a company's auditors have doubts about its ability to continue as a going concern, they may include a going concern qualification in the company's financial statements. This qualification indicates that there is substantial doubt about the company's ability to continue operating in the future. It is important for investors and other stakeholders to be aware of going concern qualifications because they may impact the value of the company's securities and the decision-making of potential investors.
The provisions related to going concern under the Companies Act, 2013 are as follows:
Section 129(3) of the Companies Act, 2013:
This section requires every company to prepare financial statements that give a true and fair view of the state of affairs of the company. The financial statements must be prepared on the going concern basis unless management intends to liquidate the company or cease its operations, or has no realistic alternative but to do so.
Section 134(3)(h) of the Companies Act, 2013:
This section requires the Board's Report to contain a statement on the company's affairs, including information on its ability to continue as a going concern.
Schedule III of the Companies Act, 2013:
This Schedule prescribes the format for the presentation of financial statements. The statement of profit and loss and the balance sheet must be prepared on the going concern basis, and the notes to the financial statements must disclose any material uncertainties related to the company's ability to continue as a going concern.
Accounting Standard (AS) 1 - Disclosure of Accounting Policies:
This accounting standard requires companies to disclose their accounting policies, including the basis of accounting used in preparing the financial statements, and any changes in accounting policies that have a material effect on the financial statements. If the company's financial statements are not prepared on a going concern basis, this fact must be disclosed along with the reasons for not adopting the going concern assumption.
Auditing Standard (AS) 570 - Going Concern:
This auditing standard requires the auditor to evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time, not exceeding twelve months from the date of the financial statements. If there is substantial doubt, the auditor must provide an explanatory paragraph in the audit report, disclosing the uncertainties and the possible implications for the financial statements.
Conclusion
Going concern concept is a critical aspect of financial reporting that every investor and stakeholder should understand. The idea that a company will continue to operate in the foreseeable future is essential in determining its financial position, access to credit, and overall performance. As a blogger, it is crucial to stay informed about the provisions related to going concern under the Companies Act, 2013, as well as the various accounting and auditing standards that apply. By doing so, we can provide our readers with up-to-date and accurate information to help them make informed decisions about their investments. So, if you're looking to invest in a company, make sure to assess their going concern status and take it into account when making your investment decisions.
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