The Going Concern Assumption: A Critical Appraisal

Author(s): James M. Fremgen

Source: The Accounting Review, Vol. 43, No. 4 (Oct., 1968), pp. 649-656
Published by: American Accounting Association
Stable URL: https://www.jstor.org/stable/243624
Accessed: 02-05-2019 02:10 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

American Accounting Association is collaborating with JSTOR to digitize, preserve and

extend access to The Accounting Review

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 The Going Concern Assumption:
A Critical Appraisal

James M. Fremgen

SCARCELY an introductory account- caravan to purchase silks and spices in the

ing text fails to advise its neophyte Orient and bring them to Europe for sale).
reader that the accounting entity is Such an enterprise was not intended to
assumed to be a going concern, With this outlive the completion of the single trans-
obviously important (It was in italics, action. The going concern, on the other
wasn't it?) bit of information carefully hand, is designed to effect an indefinite
stored in his mind and/or notebook, the succession of transactions. It has no pre-
student proceeds with his study of ac- determined limit set upon its life; it may
counting-quite likely never again to continue to function as long as it is suc-
encounter that obviously important idea, cessful. Unquestionably, there is a sig-
except, perhaps, on an examination. nificant difference of intent between the
Certainly, the going concern or continuity single venture and the modern business
assumption seems to be one of the most corporation. However, one might question
firmly entrenched and least controversial whether it follows that this difference of
of the basic concepts (conventions? postu- intent justifies a different assumption about
lates?) of accounting. Yet, a survey of the the life of the enterprise.
accounting literature, particularly the "au- Although generally accepted, the con-
thoritative pronouncements," causes one tinuity assumption has not gone unchal-
to question the importance and possibly lenged. A memorandum prepared by
even the validity of the assumption. Such Arthur Andersen & Co. completely rejects
is the purpose of this paper. the idea. It alleges that the going concern
assumption is unfounded as a general
DEFINITION OF A GOING CONCERN
premise and is not a proper postulate of
While it has been phrased in various accounting. Worse, the memorandum sug-
ways, the most general statement of the gests that the continuity assumption has
going concern assumption follows a com- often been used by accountants to justify
mon pattern. "In the absence of evidence
1 Accounting and Reporting Standards for Corporate
to the contrary, the entity is viewed as Financial Statements and Preceding Statements and Sup-
remaining in operation indefinitely."' This plements (American Accounting Association, 1957),
p. 2.
view of the entity was originally formulated
in contrast to the once common single
venture, a business enterprise designed to James M. Fremgen is Associate Professor
effect a single and usually substantial of A ccounting at the Naval Postgraduate
transaction (e.g., dispatching a ship or a School.

649

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 650 The Accounting Review, October 1968

ignoring the obvious imminence of liquida- port or refute that view, then the assump-
tion.2 Even writers who accept and use the tion of continuity becomes a meaningless
assumption recognize its limitations. Many charade, a nullity. Worse, if proper ac-
conceded that it is not "a scientific fact or counting depends upon whether or not an
even a completely rational assumption."' entity is a going concern, blind acceptance
Paton admitted that the assumption "is of the assumption may result in misleading
incapable of demonstration in the particu- financial statements.
lar case," although he contended that it
"is thoroughly reasonable and needs little Going Where?
qualification "4 While he employed it to Even if there is evidence that an entity
support his argument, Carson observed, will probably continue to operate indefi-
"The going concern assumption is not nitely, what does continuity imply besides
without defects. Statistics on the length of mere existence? Does it, for example,
life of business undertakings do not support imply continuity of ownership? If it does,
it.) 5 then large corporations whose common
stocks are regularly traded are not going
IMPLICATIONS OF CONTINUITY
concerns. Clearly, such an interpretation
Most discussions of the going concern conflicts with the usual notion of contin-
concept simply observe that the entity may uity. Ladd points out the distinction be-
be assumed to continue indefinitely and, tween the liquidation of a business and the
therefore, will not be liquidated in the fore- sale of a business. In the former case, the
seeable future. If this is all the assumption firm ceases to exist. Its employees lose
implies, then it is a sterile postulate at their jobs. Its customers must seek new
best and is invalid with respect to thou- sources of supply. In the latter instance,
sands of new small businesses which are however, the firm continues to exist, even
organized each year and are destined to though it has new owners and may now be
fail within the year. More attention needs regarded organizationally as a division of a
to be given to the bases for the assumption larger corporation rather than as a sep-
in each individual entity. Perhaps the arate company. Its employees retain their
definition cited earlier should be alteredjobs. Its customers continue to be served.6
to read that "the entity is viewed as re- Chambers further refines the notion of
maining in operation indefinitely" in liquidation. He distinguishes between
recognition of evidence to that effect, not liquidation and orderly liquidation.
forced
"in the absence of evidence to the con- In a forced liquidation, the initiative rests
trary." This change in wording suggests with the enterprise's creditors. Assets are
that continuity should be a judgment sold under duress at prices often disadvan-
based on evidence in the case. Thus, if tageous to the seller. In an orderly liquida-
relevant at all, continuity would be a
conclusion, not an assumption. As a matter 2 The Postulate of Accounting: What It Is, How It Is
Determined, How It Should Be Used, (Arthur Andersen
of fact, if the accountant actually sought
& Co., September 1960), pp. 18-20.
to determine whether there was "evidence 3George 0. May, "Postulates of Income Account-
ing," The Journal of Accountancy, (August 1948), p. 108.
to the contrary" and found none, he could
4W. A. Paton, "Assumptions of the Accountant," in
posit continuity as a conclusion rather than Herbert F. Taggart (ed.), Paton on Accounting (The
University of Michigan, 1964), p. 129.
an assumption. On the other hand, if the 6 A. B. Carson, " 'Replacement Cost' Is Compatible
accountant and particularly the auditor With Going Concern Postulate," The Journal of Ac-
countancy, (January 1949), p. 35.
-assumes that a firm is a going concern 6 Dwight R. Ladd, Contemporary Corporate Account-
without even considering evidence to sup- ing and the Public (Richard D. Irwin, Inc., 1963), p. 44.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 Fremgen: The Going Concern Assumption 651

tion, on the other hand, the initiative nitely. Clearly, such a far-reaching inter-
remains with the management of the pretation of continuity must be based on
enterprise. Assets are sold or consumed in evidence of probable indefinite existence,
the ordinary course of business at prices not on the mere assumption thereof.
as favorable to the enterprise as any then One final point remains to be considered
available.7 The reader will recognize that here. Does the assumption of a going con-
orderly liquidation is nothing more nor cern, particularly if it implies replacement
less than the normal operations of an entity of existing resources, include the assump-
not faced with forced liquidation. So tion of continued operation at a profit? If
Chambers regards it. He points out, "Un- we accept the hypothesis that a business
less a firm is in the process of orderly enterprise (as opposed to a governmental
liquidation, it can scarcely be described as or charitable organization) must earn a
'going.' "8 Substantially the same idea profit in the long run in order to remain in
has been expressed in different words. The operation, then the going concern assump-
entity is expected to continue to operate tion would seem to imply profit as well as
long enough for it to complete its "existing mere continuity. If we deny that hypothe-
plans and programs"9 or "to carry out its sis, then we must recognize that the bulk
existing commitments."10 Completion of of current accounting practice, with its
existing programs and commitments would income orientation, is misdirected.
include the conversion of productive re-
CONTINUITY AND ACCOUNTING PRINCIPLES
sources into salable products and the sub-
sequent sale of such products through nor- The study of accounting per se has no
mal market channels, and this is the es- reason to posit abstract observations about
sential meaning of orderly liquidation. the environment. The facts that the earth
Ladd suggests that the assumption of is round and that gentlemen prefer blondes,
continuity (he calls it "permanence") im- for example, may be true; but they have
plies that an enterprise will continue to no implication for accounting. Thus, the
maintain its competitive capacity.11 This fact (if it is such) that an entity has an
implication goes even further than that of indefinite life must have some implications
orderly liquidation, for it suggests that for accounting. Otherwise, accountants
the entity will continue beyond completion should cease to concern themselves with it.
of existing programs by formulating new It is legitimate to ask whether accounting
ones and acquiring the resources necessary principles and procedures are in some way
to implement them. Carson"2 and Sprouse"3 determined by the assumption of con-
share this view that the going concern tinuity. If the going concern concept is
assumption implies replacement of exist- relevant to accounting, then accounting
ing assets. As we shall see shortly, these principles should be predicated, at least
writers employ their interpretation of partly, upon it. Further, the accounting
continuity to support particular approaches 7 Raymond J. Chambers, Accounting, Evaluation and
to the question of asset valuation. For the Economic Behavior (Prentice-Hall, Inc., 1966), p. 204.
8 Ibid.
present, it is sufficient to note that this I American Accounting Association, loc. cit.
interpretation goes far beyond the usual 10 Eldon S. Hendriksen, Accounting Theory (Richard
D. Irwin, Inc., 1965), p. 88.
implication that the entity will not be Ladd, op. cit., pp. 55-6.
forced into liquidation in the foreseeable Carson, loc. cit.
13 Robert T. Sprouse, "The Measurement of Finan-
future. Yet, it is entirely consistent with cial Position and Income: Purpose and Procedure," in
the basic definition that a going concern is Robert K. Jaedicke, Yuji Ijiri, and Oswald Nielsen
(eds.), Research in Accounting Measurement (American
expected to remain in operation indefi- Accounting Association, 1966), p. 113.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 652 The Accounting Review, October 1968

principles applicable to a liquidating con- in the former statement is more consistent

cern should be different. If these conclu- with legal considerations than with econo-
sions are not valid, then the significance of mic concepts. There does not appear to be
the going concern assumption in account- any evidence that the accounting principles
ing is unspecified, if not nonexistent. applied to a single venture were greatly
different from those used in a going con-
Postulate and Principles
cern, however. This might be explained by
Clearly, Moonitz believed that contin- the fact that a venture was expected to
uity is significant in accounting, for he undergo an orderly rather than a forced
listed it as one of the basic postulates on liquidation. But, if this is so, why should
which accounting principles rest."4 So did the going concern assumption be necessary
Sanders, Hatfield, and Moore"5 and Gil- to contrast the modern business enterprise
man16 before him, although these earlier with its limited-life predecessor?
writers referred to it as a convention rather
than a postulate. Yet, the ensuing discus- A ccrual A ccounting
sions of accounting principles failed to May alleged that all allocations between
make clear how the going concern postulate past and future depend upon the assump-
determines the principles to be applied. tion of continuity of operations." In other
Although Sprouse and Moonitz17 suggested words, the accrual basis of accounting
that their broad accounting principles de- assumes that the entity is a going concern.
rive from the postulates set out in the ear- Therefore, depreciation accounting, as an
lier research study, their discussions of example, would be based upon the con-
specific principles do not include explana- tinuity postulate. Consequently, in an
tions of how the continuity postulate led to entity faced with forced liquidation, depre-
them. The same is true of Sanders, Hat- ciation accounting would be inapplicable.
field, and Moore's report. Although they Let us examine this implication. Suppose
considered the going concern to be an that a large department store is to be
important convention, they did not use it operated by a receiver for one year in order
directly to justify specific principles. Per- to liquidate its inventory at prices rea-
haps this lack of direct linkage between the sonable favorable to the creditors. The
postulate and principles simply reflects receiver has decided that continuation of
the fact that the going concern is so funda- the store's delivery service is consistent
mental an assumption that it needs no with this objective. In order to do this,
justification in terms of consequent prin- however, he must purchase a new delivery
ciples. Perhaps, too, the postulate is ac- truck with a total useful life of five years.
cepted at the outset because it appears to Clearly, the entity here is not a going con-
be reasonable but is not referred to again cern. How, then, will it account for the
because it is not sufficiently specific to delivery truck? It will record it initially at
support any particular principle.
Possibly the strongest single indication 14 Maurice Moonitz, The Basic Postulates of Account-
ing: Accounting Research Study No. 1 (American Insti-
of the usefulness of the going concern
tute of CPAs, 1961), pp. 38-41.
postulate as a basis for accounting prin- 15 Thomas Henry Sanders, Henry Rand Hatfield, and
Underhill Moore, A Statement of Accounting Principles
ciples is the fact that different accounting
(American Accounting Association, 1959), p. 3.
principles are applied to a liquidating con- 16 Stephen Gilman, Accounting Concepts of Profit (The
Ronald Press Company, 1939), p. 205.
cern. The bases of asset valuation in a
17 Robert T. Sprouse and Maurice Moonitz, A Tenta-
statement of affairs are different (except tive Set of Broad Accounting Principles for Business
Enterprises: Accounting Research Study No. 3 (American
in the case of cash) from those in a balance
Institute of CPAs, 1962), p. ix.
sheet. Also, the scope of reported liabilities 18 May, loc. cit.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
Fremgen: The Going Concern Assumption 653

its actual cost. The difference between an asset are future operations at a profit.
this cost and the estimated resale value In a similar manner, the Accounting Prin-
at the end of one year will be charged to ciples Board found itself capable of de-
depreciation expense for the year of opera- ciding-twice-how the investment credit
tion in receivership. Thus, at the end of should be reported, without having to
the year, the asset will be reported at its resort to the going concern postulate.20
originally estimated realizable value. How The purpose of the foregoing paragraph
does this treatment differ from conven- is not to deny the validity of income tax
tional depreciation accounting? Only the allocation or of the accepted method
amounts are affected by the prospect of (whatever it may be) of accounting for the
forced liquidation. The principle is the investment credit. Nor is it to suggest that
same. The useful life and the estimated these accounting principles violated the
salvage value may be different from what assumption of continuity. It is simply to
they would be if the store expected to use point out that accounting principles which
the truck for five years. Hence, the amount touch directly upon the future operations
of depreciation would likely be different; of the entity have been formulated without
but the principle of depreciation account- explicit reference to the going concern
ing would be applied in the same way. Had assumption. Perhaps this is as it should be.
the store already owned the truck when Accounting principles should be predicated
the receiver assumed responsibility for upon observations of and/or logical in-
operations, depreciation accounting would ference of their usefulness to the readers of
have continued, although the annual ex- financial statements.21 They ought not con-
pense might have been adjusted to conform flict with obvious facts about the environ-
to a shortened expected useful life and a ment within which accounting functions-
revised salvage value. This is no different that is, with postulates, as Moonitz used
from the procedures applied by a going the term. But the statement of a postulate
concern when an asset's useful life is re- does not lead directly to a principle. It
determined. merely defines a condition in light of which
a useful and justifiable principle should be
Accounting for Income Taxes
conceived.
If allocations between the past and the
future were really predicated upon the ASSET VALUATION
going concern assumption, one might Liquidating Value
reasonably expect that this assumption
Most references to the going concern
would be raised in support of the contro- assumption occur in discussions of the
versial principle of income tax allocation.
proper basis for asset valuation. The most
Yet, the Committee on Accounting Pro-
familiar application of the going concern
cedure recommended the recognition of a
deferred tax liability that is not currently 19 Accounting Research Bulletin No. 43: Restatement
and Revision of Accounting Research Bulletins (American
payable and, indeed, will never be payable Institute of CPAs, 1953), Ch. lOB.
unless there are future profitable opera- 20 APB Opinion No. 2: Accounting for the "Investment
Credit" (American Institute of CPAs, 1962) and APB
tions, without so much as mention of the Opinion No. 4: Accounting for the "Investment Credit"
going concern concept. Somewhat incon- (American Institute of CPAs, 1964). At the time of this
writing, the Accounting Principles Board has circulated
sistently, though conservatively, the Com- an exposure draft of a new opinion on accounting for
mittee denied the existence of an asset in both deferred taxes and the investment credit. In this
draft, the going concern concept is specifically stated as
connection with an operating loss carry- a basic assumption.
forward."9 Clearly, however, all that need 21 James M. Fremgen, "Utility and Accounting Prin-
ciples," TEE ACCOUNTING REVIEW, (July 1967), pp.
be assumed to justify recognition of such 457-67.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 654 The Accounting Review, October 1968

in this context simply justifies ignoring the Historical Cost

forced liquidation value22 or "pouncing
Asserting that the going concern assump-
value"23 of the assets. Little attention has
tion justifies ignoring forced liquidation
been given to evidence tending to support
value in the measurement of assets does not
or refute the assumption, however, Paton
say what the proper basis of asset valua-
did caution that, even in an entity pre-
tion should be. Many early writers ap-
sumed to have an indefinite life, an individ-
parently took the opposite point of view,
ual asset that was obsolete or useless should
however. Rejection of forced liquidation
be reported at no more than its net salvage
value was taken as proof that assets should
value.24 This caution should be viewed as a
be valued at historical cost.26 Inasmuch as
general rule. The fact that an entity does historical cost was then widely accepted as
not appear to be faced with imminent
the only alternative, this point of view is
forced liquidation does not mean that each not surprising. Nevertheless, no logical
of its assets is not. For example, once
relationship between the going concern
Studebaker Corporation discontinued do-
concept and historical cost was ever demon-
mestic automobile production, its facilities
strated. Rather, there were two essentially
designed for that purpose exclusively were separate notions: the entity was a going
properly considered as assets held pending concern and assets should be reported at
sale at forced liquidation prices. These historical cost. These notions were coinci-
properties were not being offered for sale
dental; there was no causal relationship
as part of a going operation. Moreover, no between them.
buyer appeared with the intention of
manufacturing automobiles in the South Current Values
Bend facilities. When an assembly plant is In 1949, Carson argued that replacement
offered for sale for whatever use a prospec- cost is more compatible with the going
tive buyer might have in mind (e.g., as a concern assumption than is historical cost.
warehouse), the initiative regarding price "The assumption of an indefinite life,"
rests with the buyer. Clearly, this is a he contended, "provides not so much a
case of forced liquidation. Yet, Stude- basis for conventional depreciation ac-
baker, as a total entity, was more likely to counting [based on historical cost], as a
continue indefinitely after shutting down reason for thinking in terms of replace-
its automobile production than before. ments and replacement costs."27 Edwards
Even if forced liquidation of specific as- and Bell specifically accept the going con-
sets is obviously imminent, the problem of cern assumption in choosing to concentrate
asset valuation may not be solved. Ex- on the business profit concept, which en-
plicit denial of continuity does not neces-
sarily lead to a specific monetary value for 22 Paton, op. cit., p. 128.
23 Sanders, Hatfield, and Moore, icc. cit. Creditors, of
the assets awaiting disposition. Perhaps no
course, are here envisioned as pouncing on the fast
objectively determinable liquidation value dwindling assets of a moribund concern.
24 W. A. Paton, "Aspects of Asset Valuation," THE
can be established until one or more bids
ACCOUNTING REVIEW, (June 1934), p. 124.
have been received. In such a situation, 25 In its 1963 annual report, Studebaker provided for
anticipated losses on disposition of its South Bend facil-
the assets held for sale may continue to ities by an extraordinary charge to income. Offsetting
appear in the balance sheet at original cost credits were made to plant and inventory accounts and
also to both current and long-term liabilities.
less accumulated depreciation, with a foot- 26 W. A. Paton and A. C. Littleton, An Introduction to
note disclosing their status and the likeli- Corporate Accounting Standards (American Accounting
Association, 1940), pp. 10-11. Gilman, op. cit., p. 81.
hood of a loss at the time of ultimate
May, op. cit., pp. 110-11.
disposition.25 27 Carson, loc. cit.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 Fremgen: The Going Concern Assumption 655

tails the valuation of assets at current any or to all of the assets. Canning pointed
out,
[replacement] cost.28 Similarly, Ladd for example, that a complex mining
recog-
nizes indefinite existence as a basic con- installation might be wholly inoperable for
vention of accounting and regards replace- want of a single boiler tube. Thus, with all
ment cost as the most appropriate basis of other assets already in place, the anticipa-
asset valuation on both theoretical and tory value of that boiler tube is equal to
practical grounds.29 Sprouse, too, finds the entire stream of expected cash flows
replacement cost more consistent with from operation of the mine.35 While this
continued operations.30 This conclusion may be a valid, if extreme, application of
follows quite naturally from the position marginal analysis, it is hardly a useful
noted earlier, that continuity implies re- basis for the valuation of individual assets
placement of assets, so that the entity will in financial reports. Thus, going concern
outlive its shortest-lived assets.3' value is a measure that can be applied
Chambers rejects replacement cost as usefully only to the entire entity. Even
the preferable basis of asset valuation. He then, it cannot be quantified with the de-
recommends, instead, use of the current gree of objectivity that accountants nor-
cash equivalent of the asset, the price at mally demand. Yet, in the abstract, it
which it could be realized in the process of would seem wholly compatible with the
orderly liquidation. This price, he argues, assumption of indefinite existence.
is wholly consistent with the notion of
continuity of operations.32 Sprouse and CONCLUSIONS

Moonitz advocate net realizable value as A review of the foregoing discussion sug-
the general basis of inventory valuation, gests three general conclusions.
presumably in accordance with the under- 1. Although one of the most hallowed
lying postulates, which include conti- concepts in the literature of accounting,
nuity.33 Net realizable value, it would seem, the going concern assumption has had no
is fundamentally the same thing as current important influence on the formulation of
cash equivalent in the case of inventories.34 accounting principles. Various writers have
found it to be consistent with significantly
Going Concern Value
different principles of asset valuation.
The going concern value of an asset is Official pronouncements on accounting
the present worth of the future cash flows
28 Edgar 0. Edwards and Philip W. Bell, The Theory
that the asset may be expected to generate. and Measurement of Business Income (University of
One might be tempted to conclude that, California Press, 1961), pp. 90-2 and 275.
29 Ladd, op. cit., pp. 43 and 55-6.
in theory, this is the basis of asset valua- 30 Sprouse, loc. cit.
tion most consistent with the going con- 31 Of course, as the shortest-lived assets are replaced,
others take their place as the shortest-lived. Hence, the
cern assumption. It is, of course, subject firm always has short-lived assets which must be re-
placed in order for the full benefit to be obtained from
to the important practical limitation that
the longer-lived items. Carson, loc. cit.
it cannot be measured objectively. Future 32 Chambers, op. cit., pp. 92 and 204.
cash flows cannot be predicted with 33 Sprouse and Moonitz, op. cit., pp. 27-8.
34 As a matter of fact, Chambers indicates that the
certainty. Further, cash flows attributable current cash equivalent of manufactured inventories is
to individual assets employed in harmony the current replacement cost of the goods and services
sacrificed in production (op. cit., p. 232). This is equiva-
(e.g., plant and machinery) are indetermi- lent, in effect if not in initial premise, to Edwards and
nate. Thus, where several assets are mu- Bell's "current cost." Thus, Sprouse and Moonitz
appear actually to come closer to current cash equiva-
tually interdependent in the production lent in their recommendations regarding inventories
process, the total future cash flows from than does Chambers himself.
35 John B. Canning, The Economics of Accountancy
production operations could be related to (The Ronald Press Company, 1929), pp. 189-90.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms
 656 The Accounting Review, October 1968

principles have largely ignored the con- general postulate upon which accounting
tinuity assumption in developing argu- principles must rest, then there would be
ments to support their conclusions. no principles for the liquidating concern.
2. There is no general agreement as to Yet, there are far too many liquidating
the exact implication of the going concern concerns for accounting to ignore them.
concept. It has been held to mean simply Nor are they ignored. Accounting prin-
the absence of an imminent forced liquida- ciples for the firm undergoing forced liqui-
tion. It has been said to mean that the dation do exist. They follow from an
entity will survive long enough to permit inescapable conclusion that the entity is
completion of present programs and the not a going concern. In the same way,
orderly liquidation of assets now held. principles for the continuing firm should be
It has been extended to imply replacement applied only where there is evidence that
of present assets with new ones to be used the entity will operate in the future.
in completing present and future programs. In summary, then, the going concern
Finally, it can quite logically be construed concept may be a valid description of the
to mean continued operation at a profit. accounting entity, if it is justified by evi-
Perhaps this diversity of interpretation dence in the particular case but not if it is
helps to explain why the concept is not offered as an untested general assumption.
widely used to support proposed account- Even where it is a valid description of the
ing principles. entity, however, it does not help to formu-
3. Continuity is a tenuous assumption at late meaningful accounting principles. It is,
best. The accountant should not assume at best, an innocuous observation about
that a firm is a going concern. He should the environment in which the accountant
investigate to ascertain whether such is or does his work. It offers him no real guidance
is not the case. If continuity were a valid in the conduct of that work.

This content downloaded from 45.63.6.177 on Thu, 02 May 2019 02:10:04 UTC
All use subject to https://about.jstor.org/terms