Marani Brands Inc. (MRIB)

[Suretrader]

Hi jspyder85, that was a great link you posted. The auditor has to post that note when the company's audited financials show some sort of financial risk from an ongoing debt and expenses. In the case of Marani Brands, it shows a previous debt, a higher amount of growing expenses vs income, in which it was expected on this interim financial statement since CA license was not active until the last week of the first quarter. Amazingly, Marani Brands showed revenues and better yet, it showed a positive gross profit from the only week they were able to distribute.

Another great thing from that note is that its a positive step towards audited financials since they have been evaluated and approved by an accounting firm.

Its not uncommon to see that note in OTC companies. Here is a pretty good explanation: Pay a closer attention to the bold paragraphs.

The Going Concern Principle

The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.

An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party.

If the accountant believes that an entity may no longer be a going concern, then this brings up the issue of whether its assets are impaired, which may call for the write-down of their carrying amount to their liquidation value. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits.

The going concern concept is not clearly defined anywhere in generally accepted accounting principles, and so is subject to a considerable amount of interpretation regarding when an entity should report it. However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern.

The auditor evaluates an entity’s ability to continue as a going concern for a period not greater than one year following the date of the financial statements being audited. The auditor considers such items as negative trends in operating results, loan defaults, denial of trade credit from suppliers, uneconomical long-term commitments, and legal proceedings in deciding if there is a substantial doubt about an entity’s ability to continue as a going concern. If so, the auditor must qualify the audit report with a statement about the problem.

It is possible for a company to mitigate an auditor's view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed. By doing so, the auditor is reasonably assured that the business will remain functional during the one-year period stipulated by GAAS.

http://www.accountingtools.com/going-concern-principle