Many a time and oft In the Rialto you have heard going concern issue, So what is that?

Yes, you heard it in the news, in business arena, professional network and this “going concern” issue appears in one form or another in most corporates that went under. In Hyflux and CWT defaults of bond repayments casting doubts on going concerns and again on 12 April 2019 when Pacific Radiance’s auditor flags going concern issue due to material uncertainties.

Going concern is a one of the fundamental assumption for accounting, for which most financial accounting standards (FRS) is based upon. It sets the valuation of the company’s financials specifically all the assets and liabilities and reset it either from the usual historical cost, amortised cost or fair value to a realisation value. It is likely that the realisation value which estimates the immediate exit value is far lower (usually < 50%) than the book value due to very short term period to realise the assets of the Company. Going concern assumption is critical not just for accounting but also on the actual business model of the Company. When going concern is in doubt, it means that the company will not be able to continue its operations for the foreseeable future and the alternatives available will be either to liquidate the company or to cease operations or restructure to bring the company to a state where it can at least be able to fund (either internally or externally) for its continual existence. The Company may no longer has the resources available at its disposal to continue operating to generate its revenue – employee may leave due to non-payment, suppliers is no longer willing to provide the necessary raw material or services to enable the completion of the revenue process. Even customers may attrite for uncertainty of future supply of goods or services due to the doubt on the survival of the company. Simply, a breakdown of the whole business model of the company.

It is therefore, critical that in all financial reporting, that the Company (or auditors) need to ensure that the Company is a going concern for the foreseeable future and that there is nothing that indicates otherwise.

Some of the signs casting doubts on going concern include the following:


  • Net liability or net current liability position.
  • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets.
  • Indications of withdrawal of financial support by creditors.
  • Negative operating cash flows indicated by historical or prospective financial statements.
  • Adverse key financial ratios.
  • Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
  • Arrears or discontinuance of dividends.
  • Inability to pay creditors on due dates.
  • Inability to comply with the terms of loan agreements.
  • Change from credit to cash-on-delivery transactions with suppliers.
  • Inability to obtain financing for essential new product development or other essential investments.


  • Management intentions to liquidate the entity or to cease operations.
  • Loss of key management without replacement.
  • Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
  • Labor difficulties.
  • Shortages of important supplies.
  • Emergence of a highly successful competitor.


  • Non-compliance with capital or other statutory or regulatory requirements, such as solvency or liquidity requirements for financial institutions.
  • Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy.
  • Changes in law or regulation or government policy expected to adversely affect the entity.
  • Uninsured or underinsured catastrophes when they occur.

It is ultimately a company management to exercise its judgement to assess the degree of uncertainty of the signs of going concern issue and how these uncertainties will impact the continual operations of the Company. Where it is highly probable that these signs will appear or if it already happening and these events are critical to the survival of the Company, then fundamentally, the Company has a going concern issue.

In terms of audit opinion, it is either one of the three outcomes in the order of increasing negativity: an unmodified opinion with disclosure of material uncertainty provided that disclosure In the financial statements is adequate, a qualified opinion stating that the financial statements are materially misstated due to inadequate disclosure or an adverse opinion without disclosure.

In Pacific Radiance’s case, the following going concern signs are observed by the auditors:

  1. Its current liabilities exceeded its current assets by US$486.8 million – casting doubt on the ability of the Company to pay its liabilities within the next 12 months,
  2. its total liabilities exceeded total assets by US$158.5 million – casting doubts on the ability of the Company sustainability beyond 12 months. Where the company cannot even service its current liabilities, it is likely that it no longer has the default credit repayment terms of non-current, and the non-current or far end liabilities is likely to crystalised into current or even immediate payment. This is especially so when loan covenants are breached or when a “run” on the Company may be triggered by eager creditors to demand immediate payments.
  3. It reported a net loss of US$101.2 million and more importantly an operating cash flow of negative US$8.58 million. This means on the cashflow basis, the company is bleeding close to US$8m and unless the company has a cash bank of at least that amount to burn, it will have nothing to pay its dues. We have discussed the significance of cashflow statement vs profit or loss statement in an earlier article “Cash is King” 11 March 2019. In fact, we have seen the same beast rearing its head in the Hyflux demise which at that earlier historical point in time, not getting the notoriety that it deserves.
  4. An unnamed vendor had also filed winding-up applications with the Singapore High Court in relation to statutory demands for payment for services. A typical first sign for the avalanche of runs on the company for the creditors.

Going concern is not an accounting concept that impacts the financials of a company, it is in fact a fundamental pillar for all businesses. It is the actual ability for a company to operate as a going concern and upon which the financials are the objective outcomes. There is nothing to measure or account for if there is no activity In the first place. Except to try to eke out for what’s left to the creditors.