Basic Postulate for an Ongoing Business

September 3, 2024

Accounting

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Hector Galicia

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The concept of «going concern» in the Financial Reporting Standards (NIF) In Mexico, it is essential for the preparation of financial statements. It refers to the assumption that an entity will continue to operate in the foreseeable future, that is, that it has neither the intention nor the need to liquidate or significantly reduce its operations.

Going Concern Principles:

  1. Basic Assumption: The “going concern” assumption implies that financial statements are prepared on the assumption that the entity will continue to operate. This affects the valuation and presentation of assets and liabilities, since it is expected that the entity will be able to realize its assets and settle its liabilities in the normal course of its operations.
  2. Continuous Assessment: The entity's managers must continually assess whether there are any significant uncertainties related to events or conditions that may call into question the entity's ability to continue as a going concern.
  3. Revelation of Uncertainties: If there is significant doubt about the entity's ability to continue as a going concern, the uncertainty should be disclosed in the financial statements. This includes a description of the events or conditions that give rise to the uncertainty and the entity's plans to address the situation.
  4. Change of Premise: If the directors conclude that the entity is no longer a going concern, the financial statements must be prepared on a different basis, usually a liquidation basis. This means that assets and liabilities must be measured to reflect their value in a liquidation situation.

Importance in Practice:

The going concern assumption is crucial to users of financial statements, such as investors, creditors and other stakeholders, as it influences decisions about the valuation and presentation of assets and liabilities. When this assumption is no longer valid, the entity must provide sufficient information for users to understand the reasons for and implications of this situation for the financial statements.

This concept is a pillar of accounting, as it ensures that financial information reflects the operational reality of the entity and enables informed decisions to be made.

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Written by Hector Galicia

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