In accounting, the going concern postulate establishes that an economic entity will continue to operate indefinitely in the future unless there is clear evidence to the contrary. This principle is defined in the NIF A-1 as a basic postulate and is developed in greater detail in the NIF A-2: Uncertainties about going concern.
Correctly applying this principle is key, as it determines whether financial statements are prepared based on continuing operating values or liquidation values.
What does going concern mean?
Going concern implies that:
- The company will continue to operate and generate revenue for the foreseeable future.
- There is no intention or obligation to liquidate or close operations in the short term.
- Financial statements are prepared assuming continuity, not liquidation.
When there are significant doubts about viability, the situation should be evaluated and, if necessary, liquidation accounting criteria used.
Difference between going concern and liquidation
| Feature | Business in progress | Settlement |
|---|---|---|
| Base assumption | Operational continuity | Cessation of operations |
| Asset valuation | Use values | Net liquidation values |
| Perspective | Long term | Short term |
| Presentation of financial statements | Based on future projections | Based on the disposition of assets |
Practical cases
1. Company that sells vapers in the face of regulatory changes
A Mexican vape company faces an imminent ban on its products.
- No alternative plan: It would not meet the going concern assumption and would require assets to be valued for liquidation.
- With a conversion plan: If it changes its line of business and secures financing, it could continue to be considered a going concern.
2. Restaurant affected by loss of customers
A restaurant loses almost all of its customers due to public works blocking access for a year.
- With financial reserves and a reopening plan: business as usual.
- Without resources or credit: risk of non-continuity.
3. Construction company with serious litigation
A construction company faces lawsuits that threaten its operating license.
- If the probability of losing is high and there are no other sources of income: it would not be a going concern.
- With other firm contracts and financial backing: likely continuity.
Key factors to evaluate (NIF A-2)
- Current and expected profitability.
- Access to financing.
- Ability to pay debts.
- Regulatory and legal risks.
- Significant uncertainties beyond 12 months.
Decision Box: Is My Business a Going Concern?
Answer these questions with Yeah either No:
- Does the company have positive cash flow or secure access to financing?
- Can you meet your debt obligations over the next 12 months?
- Are there contracts or clients that guarantee future income?
- Are there no regulatory changes that prohibit your main activity?
- Do you have a viable plan to overcome current financial problems?
If you answer “yes” to most: Your company is likely a going concern.
If you answer “no” to several: You must evaluate whether it is appropriate to apply liquidation criteria in the financial statements.
Conclusion
He going concern in accounting It's not just a knee-jerk assumption: it requires a careful analysis of future viability. Cases like that of the vaping companies show how regulatory changes can jeopardize this principle. The key is to anticipate scenarios and have a solid plan to maintain operational continuity.
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