Going Concern under Australian Accounting Standards: What Businesses Need to Know

The going concern assumption is one of the most fundamental principles in financial reporting. When preparing financial statements, entities generally assume that they will continue operating in the foreseeable future and will not be forced to cease operations, liquidate, or significantly curtail their activities.

Under Australian Accounting Standards, particularly AASB 101– Presentation of Financial Statements and AASB 110 – Events after the Reporting Period, entities must assess whether they can continue operating for at least 12 months from the reporting date.

Under AASB 101, financial statements are prepared on a going concern basis unless management intends to liquidate the entity or has no realistic alternative.

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Key Considerations in a Going Concern Assessment

When assessing going concern, management must consider all available information about the future, including cash flows, financing ability, changes in operating conditions, and potential business risks, in order to determine whether the entity can continue operating.

If material uncertainties exist that may cast significant doubt on the entity’s ability to continue as a going concern, these uncertainties must be disclosed clearly in the financial statements so that users of the financial statements can understand the risks faced by the entity and their potential impact.

In some cases, events after year-end can change the assessment entirely. Under AASB 110, if conditions arising after the reporting period indicate that the entity is no longer a going concern, the financial statements must be prepared on a different basis (for example, a liquidation basis).

When Going Concern Becomes a Critical Issue

Going concern is not just a theoretical concept. It becomes critical when there are:

• Recurring operating losses 

• Liquidity or cash flow problems 

• Loan covenant breaches 

• Difficulty refinancing debt 

• Loss of major customers, key operations, or revenue streams 

• Significant post-year-end adverse events 

In these situations, management must carefully evaluate the specific facts and circumstances, together with future business plans and available mitigating actions.

Because going concern assessments involve significant professional judgment, they remain a key focus area for both financial statement preparers and auditors.

Why Is Going Concern Assessment Important?

In an environment of increasing economic uncertainty, going concern assessments are important not only because they determine the basis on which financial statements are prepared, but also because they directly influence how investors, creditors, and other stakeholders evaluate an entity’s financial position and future prospects.

Accurate assessment and transparent disclosure of going concern matters help improve the transparency of financial reporting, enhance users’ confidence in financial information, and support the overall quality and reliability of financial statements.

Source of information: 

📚 AASB 101 – Presentation of Financial Statements 

📚 AASB 110 – Events after the Reporting Period 

📚 Australian Accounting Standards Board (AASB)

Disclaimer

This article reflects publicly available information regarding the exposure of draft legislation as at the date of publication and is general in nature. It does not constitute tax, financial, or legal advice and should not be relied upon without obtaining professional advice tailored to your specific circumstances. To discuss how these proposed changes may affect you or your business, please contact our advisory team at Wis Australia.

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