Going concern assumption
Under the going concern assumption, a company is
viewed as continuing in business for the foreseeable
future. Financial statements are prepared on a going
concern basis, unless management either intends to
liquidate the company or to cease operations, or has
no realistic alternative but to do so. When the use of
the going concern assumption is appropriate, assets
and liabilities are recorded on the basis that the
company will be able to realise its assets and
discharge its liabilities in the normal course
of business.
If management considers that the company will not
continue to operate for the foreseeable future, the
financial statements must be prepared on a
‘liquidation’ (or ‘break-up’) basis—meaning that the
value of their assets must take account of potential
forced sales which will likely be significantly lower
and their liabilities may be significantly higher.