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Going, going, gone: The importance of the “going concern” clause

Last Monday, shares in Trump Media & Technology Group Corp. fell 21% after the company announced its annual results. Most media reports attributed the plunge to the announcement of a $58 million net loss as well as a cash crunch, but for accounting experts there was another bombshell lurking in the footnotes.

It’s right there in Note 1 to the company’s financial statements accompanying its Apr. 1 10-K filing to the Securities & Exchange Commission (yet more evidence of the importance of reading footnotes, especially on April Fool’s Day). After mentioning the company’s Sept. 8 deadline to complete its pending merger and its lack of financial resources, the footnote adds: “As a result, these factors raise substantial doubt about the Company’s ability to continue as a going concern.”

In other words, it’s entirely possible the whole company will go bust within a year. To add incompetence to injury, the company had to amend its 10-K two days later to correct a typo.

This “going concern” clause is a standard piece of accounting boilerplate intended to warn investors (and the general public) when accountants have “substantial doubt” about a company’s ability to stay in business even after considering management’s plans to fix the mess. 

As the Financial Accounting Standards Board puts it: “If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued)” 

Since accountants aren’t business journalists, they put this clause in the footnotes rather than up top. Business journalists would call that “burying the lede.”

But accountants do look for it. According to a 2012 survey by the CFA Institute, 81% of members responding said “the accounting concept of going concern is important in their analysis of a company, with 53% indicating very important.”

So if you see this “going concern” clause about a company you’ve invested in, you’d better get going far, far away or your money could be going, going, gone.

Author

  • Jeffrey Timmermans

    Jeffrey Timmermans has more than two decades of experience as a financial journalist and journalism educator, having worked as a reporter in Tokyo for The Wall Street Journal and as a managing editor for Dow Jones Newswires in Hong Kong and Singapore...

    View all posts

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