IAS 1 states that it is fundamental assumption in preparing financial statements that the entity concerned is going concern, unless it is clearly stated otherwise. Going concern means that the entity is reasonably expected to continue trading without going out of business, or very significantly curtailing its business, in the near future. Going concern problems means inability of an entity to operate as going concern.
The following are indicators of going concern problems.
- Net liability or net current liability position
- Adverse key financial ratios
- Inability to pay creditors on due dates
- Arrears or discontinuance of dividends
- Indication of withdrawal of financial support by debtors and other creditors
- Negative operating cash flow indicated by historical or prospective financial statements
- Substantial operating losses or significant deterioration in value of assets used to generate cash flow
- Inability to comply with terms of loan agreements.
- Change from credit to cash on delivery transaction with suppliers
- Inability to obtain financing for essential new products development or other essential investment
- Fixed term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short term borrowings to finance long term assets
- Loss of key management without replacement;
- Loss of major market, franchise, license or principal supplier;
- Labor difficulties or shortage of important supplies;
- Non compliance with capital or other statutory requirements.
- Changes in legislation or government policy expected to adversely affect the entity
- Pending legal or regulatory proceedings against the entity that may, if successful, result in claim that are unlikely to be satisfied.