Continuation principle

The going concern basis (even going concern principle or principle of going concern ) is a term from the accounting and states that in the assessment of balance sheet items is assumed that the continuation of business activities, provided that neither actual conflict nor legal circumstances that assumption. In addition, the term also plays a role in company valuation .

General

In Germany, by the Financial Statements Act of 19 December 1985 ( Federal Law Gazette I, p. 2355 ), which in on 1 January 1986. Power is entered, the going concern basis ( English going-concern principle ), already recognized principle of proper accounting , the § 252 2 1 paragraph no.. HGB normalized: "the assessment will start from the continuation of the company's activities, unless there are legal or factual circumstances preclude it." this provision deals with the valuation of assets and liabilities in accordance with principles of going concern, while these in accounting is generally considered a non-codified principle.

The going concern is one of the conceptual or system principles. These are basic conditions on which the conception of the annual financial statements is based. In addition to the continuation of the company, this also includes the principle of individual recording and evaluation and the principle of pagatorics ( payment settlement , nominal value principle ).

Trade and tax balance

The going concern principle applies not only to the commercial balance sheet according to Section 252 (1) No. 2 HGB , but also to the tax balance sheet . Here, the principle results from Section 6 (1) No. 1 Sentence 3 EStG, according to which the continuation of the company is to be assumed when deriving the value of an asset . In the commercial and tax balance sheet, no liquidation values ​​may be used; rather, the assets are to be valued at their amortized acquisition or production costs. In the case of debts, no obligations that arise solely when a company is dissolved ( provisions for a social plan ) may be recognized as a liability . Value-establishing and value-enhancing events between the balance sheet date and the issue of the attestation must be taken into account. The going concern assumption applies as long as there are no actual (e.g. serious economic difficulties) or legal circumstances (e.g. initiated insolvency proceedings, existence-threatening litigation risks) to the contrary. These circumstances must be so specific that a termination of the company's activities can be expected (initiation of insolvency proceedings, resolution of the shareholders to dissolve or an official production ban). The permanent illiquidity could possibly prevent the company from continuing as a going concern .

Legal bases

It is a fundamental accounting principle on which Section 252 (1) No. 2 HGB as well as IAS 1 .25, F.23 and US-GAAP (CON 1.42) are based. Concretizations can be found u. a. in statements of guidelines of the Institut der Wirtschaftsprüfer , which however do not have the character of a legal norm.

Assessment according to IDW PS 270

The Institut der Wirtschaftsprüfer in Deutschland e. V. (IDW) sets out in this IDW auditing standard the professional view according to which auditors assess the assessment of the legal representatives of the accounting company regarding the continuation of business activities, regardless of their personal responsibility.

IDW PS 270 Item 11 further explains: “The circumstances mentioned below as examples, individually or together with others, can cause the legal representatives to doubt whether it will be possible to continue business operations. However, this does not mean that if one or more of these circumstances exist, it must always necessarily be assumed that there are serious doubts about the continuation of business activities. For example, the doubts can be lifted if negative circumstances are partially or fully compensated for by other positive circumstances.

Financial circumstances

• Negative payment balances from ongoing business activities that have occurred in the past or are expected for the future,
• The debts exceed the assets or the short-term debts exceed the current assets,
• Fixed-term loans that are nearing maturity with no realistic prospect of renewal or repayment,
• Excessive short-term funding of long-term assets,
• Signs of withdrawal of financial support from suppliers or other creditors,
• Unfavorable financial key figures,
• Significant operating losses or significant reductions in the value of assets required for business operations,
• Distribution arrears or suspension of distribution,
• Inability to make payments to creditors when due,
• Inability to comply with loan terms,
• Supplier credits are no longer available,
• Inability to raise funding for important new product developments or other important investments
• Inability to obtain loans from outside without collateral,
• Use of financial instruments outside the normal course of business,
• Tense financial situation in the group.

Operational circumstances

• Leaving executives in key positions without adequate replacements,
• Loss of a main sales market, loss of main suppliers or key customers or termination of significant franchise agreements,
• Serious personnel problems,
• Bottlenecks in the procurement of important supplies,
• Insufficiently controlled use of financial instruments.

Other circumstances

• Violations of equity capital regulations or other legal regulations,
• Pending court or supervisory proceedings against the company that may lead to claims that are likely to be unsatisfiable,
• Changes in legislation or government policy that are expected to have negative consequences for the company. "

Business continuity in international regulations

IAS 1.25 requires the reporting company to assess the going concern principle on the basis of the going concern principle. To do this, the annual financial statements must be based on this principle. 1.26 requires a twelve-month forecast period after the balance sheet date with regard to the going concern. It can be assumed that the company will continue as a going concern if this is ensured for a period of at least one year after the balance sheet date. A detailed analysis can then be omitted if the company can look back on a profitable history and has immediate access to liquid funds. It is therefore a complex forecast decision. If it turns out to be negative, a going concern premise can no longer be maintained.

The International Standards on Auditing (ISA) 570 deal with the review of the “going concern” as a separate standard. In ISA 570.10 it is first made clear that the auditor's report is no guarantee of the viability of a company. The review period is limited in 570.4 - with reference to IAS 1.23 and 1.24 - to the foreseeable future; that is the next twelve months after the graduation day. 570.8 lists exemplary risk indicators, 570.9 ff. Makes suggestions for audit procedures and discussions with management. 570.33 ff. Distinguishes between three groups of cases:

• Unqualified opinion ( English unqualified opinion ) according to IAS 570.33: adequate and sufficient evidence for the assumption of the going concern premise is available;
• Negative note ( English adverse opinion ) / 34 IAS 570.34: if the assumption of going concern so essential and largely affects the financial statements that this is misleading;
• Unqualified auditor's report with addition ( English emphasis of matter paragraph ) according to IAS 570.33: if the question of the going concern involves significant uncertainties and the annual financial statements adequately express this. The going concern forecast must include all of the company's key financials .

Effects

The examination of the going concern principle is an integral part of the auditor's report . According to Section 322, Paragraph 2, Clauses 3 and 4 of the German Commercial Code (HGB), the auditor must also point out risks that may jeopardize the continued existence of the company or a major subsidiary. The attestation thus not only includes past judgments by an auditor , but also deals with existential issues in the near future. However, this does not give the attestation any guarantee of quality with regard to the viability of the audited company. In case of doubt, corporations must point out facts relating to the going concern in the management report ( Section 289 (2) No. 2 HGB).

The auditor's report in the auditor's report is also suspected early on of having an impact on the going concern of the company. Conceptually, that would be the case if individual companies collapse only because the auditor has issued an unqualified audit certificate with an amendment to IAS 570.33 (so-called going concern opinion). For this possible causal relationship, the term self-fulfilling prophecy has been used in research and practice to this day. In empirical test research, however, the findings are mixed. The presumed effect is particularly evident if the company concerned is comparatively large or the company's management competence is rather low. Extensive research reviews can be found in Carson et al. (2013) and Heinrichs (2019).

Individual evidence

1. ↑ Johannes Fischer / Otto Hess / Georg Seebauer (eds.), Bookkeeping and Cost Accounting , 1939, p. 382
2. ↑ Wolfram Scheffler, Taxation of Companies Part II: Tax balance sheet , 2010, p. 59
3. ^ Andreas Stute, Convergence of IFRS and internal corporate accounting , 2006, p. 261
4. ↑ IDW PS 270 Item 2
5. ↑ Peter Ulmer, HGB-Bilanzrecht , Volume 1, 2002, p. 489
6. ↑ International Standard on Auditing , 570 Going Concern, December 31, 2000 ( Memento of the original from January 24, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 63 kB)  
7. ↑ Martin Richter, Theory and Practice of Auditing , 1997, p. 132
8. ^ AICPA (Ed.): The Commission on Auditors' Rsponsibilities: Report, Conclusions, and Recommendations . New York 1978, p. 30 .
9. ↑ Prof Dr Robin Mujkanovic: Going Concern or not? - New professional regulations. In: NWB experts blog. April 16, 2018, accessed on March 21, 2020 (German). 
10. ↑ Pryor, Charlotte A .: Investigating the self-fulfilling prophecy effect of going-concern audit opinions with a joint model of the opinion decision and bankruptcy . ( worldcat.org [accessed March 21, 2020]).
11. ^ Heinrichs, Matthias: Going Concern Opinion, Management Competence and Insolvency Probability An empirical analysis . ISBN 978-3-658-27126-8 ( worldcat.org [accessed March 21, 2020]).
12. ↑ Elizabeth Carson, Neil L. Fargher, Marshall A. Geiger, Clive S. Lennox, K. Raghunandan: Audit Reporting for Going-Concern Uncertainty: A Research Synthesis . In: AUDITING: A Journal of Practice & Theory . tape 32 , Supplement 1, May 2013, ISSN  0278-0380 , p. 353-384 , doi : 10.2308 / ajpt-50324 ( aaajournals.org [accessed March 21, 2020]).
13. ^ Heinrichs, Matthias: Going Concern Opinion, Management Competence and Insolvency Probability An empirical analysis . ISBN 978-3-658-27126-8 ( worldcat.org [accessed March 21, 2020]).

Please note the information on legal issues!