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"Whether the company will continue? What is that supposed to mean? Well, what else would it do?!"
This is a typical reaction from many managing directors when asked whether a company should be valued on the assumption of going concern. The reason for this question may be over-indebtedness or payment difficulties. In such cases, insolvency law provisions create a presumption that the company (GmbH, AG, GmbH & Co. KG) can no longer be continued. Therefore, management, which is responsible for preparing the annual financial statements, should not rely on the assumption that they can continue to use going-concern values in this situation. It must first be ensured that the going-concern premise is met—in other words, that the business activity can be expected to continue when valuing the company.
Negative equity or payment difficulties – company continuity in annual financial statements
The German Commercial Code (HGB) stipulates that the valuation of assets and liabilities must be based on the assumption that the company will continue as a going concern, unless actual or legal circumstances dictate otherwise (Section 252 (1) No. 2 HGB). This principle applies until circumstances arise that make continuation unlikely within the period up to the end of the following financial year. The importance of this provision is highlighted by the fact that even a company's tax advisor, tasked with preparing the annual financial statements, cannot assume valuation at going-concern values if negative indicators exist. The Federal Court of Justice (BGH) has established a duty of care and warning for tax advisors, the breach of which can lead to liability.
Company continuity may be at risk if the company reports negative equity or faces payment difficulties. In such cases, countermeasures must be taken—including for accounting purposes!
It all comes down to the forecast – what does the future hold?
The conclusion that a company cannot continue is not automatic; it depends on a precise assessment of the situation. Due to the far-reaching adverse consequences of abandoning the going-concern premise, the circumstances must be severe.
A precise assessment is carried out, for example, by determining the company's hidden reserves or through a professional, situation-specific going-concern forecast that anticipates the development of earnings and cash flows. If the forecast is positive, valuation at going-concern values can be applied.
The experts at THE MAK’ED TEAM prepare these situation-specific going-concern forecasts and, if necessary, provide your tax advisor with the information required to assess the going-concern premise. Through parallel processes, the preparation of your annual financial statements is barely delayed.
The time factor should not be underestimated
There are clear deadlines for preparing commercial annual financial statements. If additional tasks arise during preparation, time can become tight. To avoid being caught off guard by this issue, keeping a constant eye on economic development is mandatory. This includes ongoing bookkeeping, ideally performed close to the balance sheet date.
The ongoing consideration of depreciation and current asset valuations (e.g., individual value adjustments) and the event-driven creation of provisions (e.g., for legal disputes) ensure a clear picture of earnings development. If these are left until the annual closing process, surprises are inevitable.
The experts at THE MAK’ED TEAM support medium-sized companies with their accounting tasks and the preparation of commercial annual financial statements. This allows you to react to developments at an early stage—in the interest of good corporate governance.
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