What is a going concern?
Going concern is the accounting assumption that a business will keep trading for the foreseeable future, normally at least 12 months from the date its accounts are approved.
What going concern means
Company accounts are normally prepared on the basis that the business will carry on trading. That is the going concern assumption. It is why assets are shown at their value in use rather than what they would fetch in a forced sale, and why long-term debts are shown as long-term.
Under UK accounting standards, the directors must assess whether the going concern basis is appropriate, looking at least 12 months from the date they approve the accounts. If there are material uncertainties, they must disclose them. If the business is not a going concern, the accounts must be prepared on a different basis, often called the break-up basis.
Example
A restaurant company finishes its year with a small loss. Its bank overdraft is due for renewal in four months, it owes HMRC £18,000 of VAT and PAYE under a time to pay arrangement, and one of its two sites has a lease ending next year.
Before approving the accounts, the directors prepare a 12-month cash flow forecast. It shows the business can pay its debts as they fall due if the overdraft is renewed and the second site closes as planned. The bank has confirmed renewal in writing. The directors conclude the business is a going concern, but they note the reliance on the overdraft in the accounts.
Why it matters for your business
Going concern is not just a technical note. It is a legal responsibility for directors. If a company keeps trading when directors know, or should know, that it cannot avoid insolvent liquidation, they can become personally liable for losses creditors suffer, under the wrongful trading rules.
Lenders, landlords and larger customers read the going concern note when they review your filed accounts, so a well-supported assessment protects your reputation as well.
Warning signs to watch
- Repeated losses or net liabilities on the balance sheet
- Falling behind with HMRC, rent or suppliers
- Relying on an overdraft or loan that is due for renewal
- Losing a major customer or contract
- A current ratio persistently below 1
If any of these apply, talk to your accountant early. A forecast, a conversation with HMRC about time to pay, or restructuring costs is far easier while there are still options. Cloudkeepers can help you build the forecast and review it with you.
Common questions
Small companies filing under FRS 102 Section 1A still prepare accounts on a going concern basis and must disclose material uncertainties if there are any. Directors make the assessment for every set of accounts, even if no special note is needed.
The accounts are prepared on a different basis, with assets at realisable value and liabilities as current. The directors must consider their duties to creditors and should take advice from an accountant or licensed insolvency practitioner promptly.