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going-concern concept


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One of four fundamental accounting concepts recognized in Statement of Standard Accounting Practice (SSAP) 2, Disclosure of Accounting Policies; it is also referred to in the Companies Act 1985 and the EU's Fourth Accounting Directive. It is the assumption that an enterprise will continue in operation for the foreseeable future, i.e. that there is no intention or necessity to liquidate or significantly curtail the scale of the enterprise's operation. The implication of this principle is that assets are shown at cost, or at cost less depreciation, and not at their break-up values; it also assumes that liabilities applicable only on liquidation are not shown. The going-concern value of a business is higher than the value that would be achieved by disposing of its individual assets, since it is assumed that the business has a continuing potential to earn profits. This assumption will underlie the preparation of financial statements. If an auditor thinks that a business may not be a going concern, the auditors' report should be qualified.

Under the terms of Financial Reporting Standard 18, Accounting Policies, which replaced SSAP 2 in 2000, users of financial statements may assume that the going-concern concept has been applied unless there is clear warning to the contrary.

Subjects: Financial Institutions and Services — Accounting.


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