Is your business a Going Concern?

Are your bankers, suppliers, customers, employees… asking questions or passing remarks about your company’s health ie. going concern (GC) status?

Given the current economic situation, may businesses may display certain symptoms that they may have caught the GC disease.

There is one more key person whom you may have to contend with in due course.. the auditor!

Auditors will increasingly question the viability of business. Helen Brand, head of ACCA reinterated this point in yesterday’s BT article entitled “Going concern dilemma for auditors”.

A CFO of a public listed company that I “accidentally” had lunch with recently, made this remark about their auditor. The company has some investment in China. To check for impairment, auditor requested that his company to do a 5-year cashflow projection and to be followed by computing for its NPV using the higher Weighted Average Cost of Capital (WACC) as the discount rate. He said the end result of that exercise is obvious. There will definitely be a write down on the investment. The write down may wipe off whatever profit and resulting in a loss. A loss ==> any going concern problem?

While a loss may not lead to a going concern problem, nevertheless the loss would activate another series of tests to confirm whether a company has the ability to meet its obligations within 12 months from its balance sheet date.

A quick and simple test would be whether Current Assets > or < Current Liabilities.

A loss in the P&L and CA Qualified Audit Report => investors/bankers withdrawing their support. Unthinkable?

Business owners, you may wish to get ready the following for the GC test.

  • a realistic business plan
  • a realistic plan to liquidate non-current assets
  • a financial support package secured
  • capital injection from shareholders
  • or any other info that will help the auditor to appreciate that your business can go on for another 12 months

Both auditors and business owners do understand the gravity of GC.

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