FRA GOING CONCERN CASE 1-7

GOING CONCERN

• The 'going concern' assumption directs accountants to prepare financial statements on the assumption that the business is not about to go broke or be liquidated.
• So, unless there is significant evidence to the contrary, accountants will base their valuations and their reporting of financial data on the assumption that the business will remain in existence for an indefinite period.
• If the going-concern assumption has not been used for a particular set of financial statement, because of the threat of liquidation or bankruptcy, the financial statement must clearly disclose that the statement were prepared with the view that the entity will be liquidated or that is a failing concern.

The going-concern assumption also influences the classification of assets and liabilities.

Without the going-concern assumption, all assets and liabilities would be current, with the expectation that the asset would be liquidated and the liabilities paid in the near future.

• TRM corporation prepared it’s financial statement based on the going concern assumption.
• TRM corporation incurred a net loss of $120.1 million in the year ended December 31,2006.
• The potential problem is that the TRM corporation may not be able to continue in business as a going concern.

This puts into question the recoverability and classification of assets and the amounts and classification of liabilities.

1. The disclosure of the company's inability to work on the assumption of continuity is necessary.
2. This disclosure puts the user of the statements on warning that the statements may be misleading if the company cannot continue as a going concern.