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Going Concern Assumption

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Welcome to the third episode of VHA Accounting Solutions’ podcast, hosted by Vidyanth Bhola. In this episode, we explore the concept of the “going concern” assumption, a fundamental principle in financial reporting.

We begin by explaining what the term “going concern” means. When an entity prepares its financial statements under this assumption, it indicates that management believes the business will continue to operate for the foreseeable future, typically at least 12 months from the assessment date.

We also discuss what happens if management has significant concerns about the entity’s ability to continue as a going concern. If there are serious doubts, these uncertainties must be disclosed in the financial statements. If it is concluded that the entity is not a going concern, the financial statements should be prepared on a different basis, with additional disclosures required.

This assessment is usually conducted at the end of each financial year, involving a judgment about the entity’s ability to continue operations. We provide examples of conditions that may indicate going concern issues, including financial challenges such as a net liability position, approaching maturity of fixed-term borrowings without renewal prospects, and negative cash flows. Other indicators may include operating difficulties like the intention to liquidate, loss of key management, or emergence of a strong competitor.

Additionally, we cover other factors such as non-compliance with statutory requirements, pending legal proceedings, and changes in law or regulation that could adversely affect the entity.

Tune in to understand the implications of the going concern assumption for your business and how VHA Accounting Solutions can support you in navigating these assessments. Your feedback and suggestions for future podcast topics are always welcome. Join us every Monday for more insights on accounting, tax, and business matters. Cheers, Vidyanth Bhola

Going Concern Assumption

For those involved in the world of finance, the going concern assumption is a well-known term.

Simply put, when an entity prepares its financial statements under the going concern assumption, it means that management of the entity believes that the entity will continue in operation for the foreseeable future (usually 12 months from date of the assessment).

If management has significant concerns about the entity’s ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case a series of disclosures are required.

Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, at a particular point in time, about inherently uncertain future outcomes of events or conditions.

The following are examples of events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.

This listing is not all-inclusive nor does the existence of one or more of the items always signify that a material uncertainty exists.

Financial

  • Net liability or net current liability position.
  • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets.
  • Indications of withdrawal of financial support by creditors.
  • Negative operating cash flows indicated by historical or prospective financial statements.
  • Adverse key financial ratios.
  • Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
  • Arrears or discontinuance of dividends.
  • Inability to pay creditors on due dates.
  • Inability to comply with the terms of loan agreements.
  • Change from credit to cash-on-delivery transactions with suppliers.
  • Inability to obtain financing for essential new product development or other essential investments.

Operating

  • Management intentions to liquidate the entity or to cease operations.
  • Loss of key management without replacement.
  • Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
  • Labor difficulties.
  • Shortages of important supplies.
  • Emergence of a highly successful competitor.

Other

  • Non-compliance with capital or other statutory or regulatory requirements, such as solvency or liquidity requirements for financial institutions.
  • Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy.
  • Changes in law or regulation or government policy expected to adversely affect the entity.
  • Uninsured or underinsured catastrophes when they occur.

Kashveer Mathura

Accounting Portfolio Manager

kashveer@vhaaccounting.com 078 882 9783

Adrian Surjoo

Quality Control Manager, SAICA

Credentials:

  • National Diploma in Cost and Management
  • Accounting
  • Advanced diploma in Accounting Sciences
  • Professional Accountant (S.A.)

Bongumusa Zondi

Director

Bongumusa Zondi, a senior accountant, blends business advisory with expertise in financial reporting and taxation. With just under a decade of experience in accounting and taxation, his career journey began by obtaining a National Diploma in Cost and Management Accounting and an Advanced Diploma in Accounting Sciences at the Durban University of Technology and University of South Africa, respectively. This was followed by a Junior Bookkeeper position at City Printing Works (Pty) Ltd. He began his SAIPA articles at Dobeyn Accounting Soultions and currently leads a dynamic accounting team and manages a sizeable portfolio of clients at VHA Accounting Solutions where he also completed his SAIPA Articles. Apart from assisting clients update their books and stay compliant with relevant authorities, he is fully interested in adding value through business advisory. Helping clients solve their financial problems and provide guidance on potential growth opportunities is his biggest passion. He has been driven by philosophies of teamwork and collaboration.

Notable achievements include qualifying as a Professional Accountant (S.A.) through SAIPA. Beyond the numbers, he enjoys watching sports, tutoring grade 12 learners, playing the piano and listening to classical music composed by Wolfgang Amadeus Mozart and George Frideric Handel, adding a well-rounded dimension to his professional life.

bongumusa@vhaaccounting.com 082 359 4536

Karishma Bhola

Director

The VHA Accounting Solutions team is excited to announce a new insurance service offering headed by Karishma Bhola. Karishma is an accredited financial advisor and has 18 years of experience in the finance industry and expertise in marketing/foreign exchange and business management. As a seasoned financial guru, she prides herself on delivering excellent client service every time.

Vidyanth Bhola

Director / CEO

Passionate about exceptional client service, Vidyanth Bhola serves a wide client base as an advisor and accountant.Vidyanth focuses on tax planning and estate and succession planning, which he approaches with enthusiasm for human relationships and a penchant for teamwork, to achieve outstanding results. In addition to being VHA Accounting Solutions Inc founder and as director of the Bhola group of companies, Vidyanth is involved on the board and advisory level with several non-profit organisations and other initiatives. Vidyanth obtained his BCom degree and H Tax Diploma from the University of South Africa after which he worked at Colenbrander Inc, as a Accounting Portfolio Manager. In 2018, Vidyanth found the accounting firm VHA Accounting Solutions Inc. Vidyanth is a family man and avid rugby fan. He enjoys learning about Aviation and flew a Boeing in the flight simulator in Dubai. Vidyanth also works on various charity organisations and is involved in various food drives. Vidyanth is a member of the South African Institute of Tax Professional (SAITA) and the Southern African Institute for Business Accountants (SAIBA).