Which of the following assumptions that underlies the preparation of financial statements assumes that companies will continue their operations over time?

ASSUMPTIONS OF FINANCIAL ACCOUNTING

There are four basic assumptions of financial accounting: (1) economic entity, (2) fiscal period, (3) going concern, and (4) stable dollar. These assumptions are important because they form the building blocks on which financial accounting measurement is based. Some are reasonable representations of the real world, and others are not. As each assumption is discussed, try to understand why it has evolved, and be especially aware of those that fail to capture the world as it really is.

Economic Entity Assumption

The most fundamental assumption of financial accounting involves the object of the performance measure. Should the accounting system provide performance information about countries, states, cities, industries, individual companies, or segments of individual companies? While it is important that each of these entities operate efficiently, financial accounting has evolved in response to a demand for company-specific measures of performance and financial position. Consequently, financial accounting reports provide information about individual, profit-seeking companies.

The process of providing information about profit-seeking entities implicitly assumes that they can be identified and measured. Individual companies must be entities in and of themselves, separate and distinct from both their owners and all other entities. This statement represents the economic entity assumption, the first basic assumption of financial accounting. This assumption ...

Last Revision: 10/20/2016

Going concern is a basic underlying assumption that is applied in all general purpose financial reporting frameworks. The assumption is that a company, or other entity, will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.  In many ways going concern is one of the most basic and easily understood accounting concepts but it can be quite difficult to apply. Yet, the integrity of the financial statements depends on the accurate application of this concept.  The following is guidance from Canadian Accounting Standards for Private Enterprises (ASPE) with regards to going concern.

Definition

There is no stand along standard for the going concern assumption.  Rather, the guidance for the application of the going concern assumption is included in Section 1000 Financial Statement Concepts as well as Section 1400 General Standards of Financial Statement

Presentation

Assessing the Entity’s Ability to Continue as a Going Concern

When preparing financial statements, management is required to make an assessment of the entity's ability to continue as a going concern. Financial statements are required to be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so (i.e. the entity is unable to carry out its commitments, obligations and objectives).  Section 1400.08 provides guidance on the assessment of the going concern assumption.

Disclosure

Different disclosure requirements apply depending on the situation.  For instance, if the financial statements are not prepared on a going concern basis this fact must be disclosed as well as the details of the basis that is being applied and the reasons the entity is not regarded as a going concern.  If the financial statements are prepared on a going concern basis but material uncertainties exist that casts significant doubt on the entity’s ability to continue as a going concern, then those uncertainties must be disclosed.  The requirements are summarized in Section 1400.17-18.

Subsequent Events

In some cases, the effect of a subsequent event may be so pervasive that the viability of the whole or a part of the business of the enterprise is brought into question. A rapid deterioration in operating results or financial position after the date of the financial statements may indicate a need to consider whether it is proper to use the going concern assumption.

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