Saturday Brain Storming Thought (131) 18/09/2021
COMPILED BY ER. AVINASH KULKARNI
GOING CONCERN VALUE
Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable
Going concern value is often higher than the liquidation value
Goodwill is the difference between going concern value and liquidation value
Going Concern
Going concern is the accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary
If a business is not a going concern, it means it’s gone bankrupt and it’s assets were liquidated
Going concern value calculation
1) Current ratio
Divide current assets by current liabilities to get the current ration
2) Debt ratio
Total liabilities divided by total assets provides the company’s debt ratio
3) Net income to net sales
This ratio measures how well the company is managing it’s expenses
Indicators of going concern problems
Negative trends
1) declining sales
2) increasing costs
3) recurring losses
4) adverse financial ratios
Employees
1) loss of key managers
2) loss of key employees
3) labor difficulties of various types
4) strikes
Systems
1) inadequate according record keeping
Legal
1) legal proceedings against the company
2) pending liabilities and penalties related to the violation of environmental or other laws
Intellectual property
1) loss or expiration of a key license or patent
Business structure
1) company has lost and been unable to replace a major customer or key supplier
Financing
1) company has defaulted on a loan
2) company unable to locate new financing
Going concern in real estate
It is effectively the sum of the value attributed to its
1) land
2) building and site improvements
3) furniture, fixures and equipments (FF & E) and operating supplies and equipment (OS & E)
4) goodwill and intangibles, if any
Importance of going concern concept
It shows the stability of the business carried on by the company
1) helps shareholders assess the financial stability of the company
2) helps business fetch loans
3) make investments on a long term basis
4) it gives comfort to creditors to do business with the company
Formula on determining the value of business
1) net worth of the business – liquidation value of the assets minus liabilities
2) your present earning power – annual earnings with an equal amount of net worth (15%)
3) add a reasonable annual salary for owner or manager
4) average earnings required (item 2 + item 3)
5) determine the average annual net earnings of the business (net profit before owners salary) over the last few years
6) extra earning power (item 5 minus item 4)
7) ask yourself over how many years you are prepared to sacrifice the extra
Example of going concern
1) General Motors went into bankruptcy in early 2000
2) Federal govt stepped in and gave GM a bailout and a guarantee
3) Hence General Motors is considered to be a going concern
Going Concern value represents
The monetary value that can reasonably be expected to be received from continuing business operations
Liquidation value represents
The total sales value of all company-owned assets
Key assumptions of going concern concept
A business will continue to exist in the near future
ie it will not liquidate or be forced out of business
Sale of going concern
The sale includes everything that’s necessary for the continued operation of the business, the business is carried on by you until the day of sale
Revenue recognition
The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected
Selling the business as going concern conditions
1) the assets must be sold as part of the transfer of a business as a going concern
2) the same assets must be used by the buyer with the intention of carrying on the same kind of business
3) there must be no significant break in trade
4) if part of a business is sold it must be capable of operating seperatly
5) there are additional rules where land is concerned
Following situations will not be transfer of going concern
1) a change in constitution of a partnership
2) where there is no transfer of assets
3) the transfer of shares in a limited company
4) the transfer of a farm business to a farmer who is certified under the agricultural flat rate scheme
VAT treatment in transfer of going concern
1) buyer will not be able to reclaim the VAT as input tax
2) seller will have to cancel any VAT invoice and refund the VAT
Plans to ensure a company remains going concern
1) restructuring debts
2) selling assets to recompense debt
3) obtaining additional financing to avoid liquidation
4) reducing expenses to increase profitability
5) obtaining additional equity from owners or shareholders
6) improving business operating conditions
7) getting a third party guarantee to mitigate risks
Signs that a company is no longer a going concern
1) a very low current ratio – insufficient cash to pay short-term liabilities
2) long unpaid dues or loan defaults
3) inability to obtain a loan
4) denial of credit by a supplier
5) reliance on discounted sales
6) long term assets in financial documentation
7) substantial debt restructuring or selling of assets
8) consistently low sales score – decline in the demand for its products hence decline profits
9) continued losses year after year
10) current or recent lawsuit
11) plans to declare bankruptcy
Warning signals of company no longer be a going concern in future
1) growth in competition
2) loss of franchise, patent or license
3) loss of principal clients
4) failure to reinvest in new product development
5) difficulty in recruiting staff
6) substantial investment using an overdraft
7) inability to pay dividends
8) uninsured or underinsured catastrophe
Catastrophe
It is an event causing great and usually sudden damage or suffering, a disaster
Compiled by:-
Er. Avinash Kulkarni
Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer
“PRESERVATION OF CAPITAL”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI
COMPONENTS OF SALE DEED-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI
SECONDARY MORTGAGE MARKET-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI
Steps to follow to become a Registered Valuer under Companies Act? ALL YOU NEED TO KNOW -An Overview
How to become a Registered Valuer under Companies Act? ALL YOU NEED TO KNOW -An Overview
REGISTERATION OF VALUERS UNDER SECTION 34 AB OF WEALTH TAX ACT-1957 – ALL YOU NEED TO KNOW ABOUT
