What is Going Concern?
The going concern assumption presumes that a company will continue its operations for the foreseeable future, usually at least 12 months from the reporting date, with neither the intention nor the necessity to liquidate or curtail material activities. It underpins the use of historical cost and most IFRS measurements.
How It Works
- Management assesses cash flow forecasts, debt covenants, and refinancing plans for at least the next 12 months.
- If significant doubt exists, management discloses it and the auditor evaluates the disclosure.
- If the company is no longer a going concern, assets are remeasured at liquidation value and liabilities at amounts payable on cessation.
- The auditor may issue a modified opinion or emphasis of matter paragraph.
Saudi Context
Saudi external auditors registered with SOCPA test going concern annually. The Capital Market Authority requires Tadawul-listed companies to disclose going concern risks promptly. For Saudi SMEs facing distress, banks supervised by SAMA review going concern assessments before extending credit.
Example
A Saudi construction company shows projected cash deficits for the next 18 months unless it secures a new loan. Management discloses the uncertainty and the auditor issues an emphasis of matter paragraph on going concern.