The Conceptual Framework for Financial Reporting is a set of principles which underpin the foundation of financial accounting. The Conceptual Framework sets out the going concern concept as one of the important underlying assumption for the preparation of financial statements.
Required:
Explain the going concern concept, illustrating your answer with suitable examples. (5 marks)
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The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
The main significance of the going concern concept is that the assets should not be valued at their ‘break-up’ value (the amount they would sell for if they were sold off piecemeal and the business were broken up).