In brief: The going concern principle is a core CGNC requirement that assumes a company will continue operating for the foreseeable future. It determines how assets are valued and liabilities recorded. When this assumption fails, financial statements must be prepared on a liquidation basis, with significant legal and accounting consequences.
In Moroccan accounting, going concern is a fundamental accounting principle. Under the CGNC, a company preparing its annual financial statements must make sure it can carry on its activities beyond the fiscal year-end. Where a cessation of activity is expected, liquidation values must be used instead.
The whole accounting framework rests on this principle: it governs how assets are valued, liabilities recorded and results presented. Business owners and accounting professionals in Morocco need a firm grasp of going concern to produce reliable financial statements that comply with applicable standards.
What is the going concern principle?
The CGNC standardizes the method for preparing financial statements. The company must prepare these statements under the assumption that it is a going concern. In other words, the company must ensure that it will continue its activities for the foreseeable future.
The preparer assumes that the company has neither the intention nor the need to cease its activities. It also assumes that the company does not intend to significantly reduce the size of its operations. If such a need exists, the company must prepare its financial statements on a different basis and disclose this basis in the ETIC (Supplementary Information Statement).
Going concern is assessed when the accounts are finalized, taking account of factors that may affect the continuation of activity for the foreseeable future. The period considered is generally the financial year following the reporting date, but known factors whose effects will occur beyond that period must also be considered. This assumption justifies valuing assets at their historical cost rather than at their liquidation value, which would often be considerably lower.
Legal basis in Morocco: Law 9-88 and the CGNC
The going concern principle has its legal foundation in Law No. 9-88 on the accounting obligations of merchants, enacted by the Dahir of 25 December 1992. This law requires every natural or legal person with merchant status to maintain accounting records in compliance with the CGNC provisions.
The CGNC classifies going concern among the seven fundamental accounting principles, alongside consistency of methods, historical cost, accrual basis, prudence, clarity, and materiality. Going concern holds a special position because it conditions the application of several other principles.
Article 11 of Law 9-88 requires the accounts to give a true and fair view. Article 16 requires risks and expenses arising during the current or a previous year to be taken into account, even where they become known between year-end and preparation of the financial statements. Going concern is assessed under the CGNC, taking account of information known when the accounts are finalized.
Going concern and its impact on financial statements
The going concern assumption directly influences the preparation of the balance sheet, the income statement (CPC), and other summary statements. When the company is considered a going concern, the following rules apply.
Asset valuation
Fixed assets are valued at their acquisition or production cost, less accumulated depreciation. Inventories are valued at entry cost or at current value if the latter is lower. Receivables appear at their nominal value, net of provisions for impairment.
Liability recognition
Debts are recorded at their repayment value. Provisions for risks and charges cover probable obligations whose amount can be estimated. Deferred charges spread over multiple fiscal years are maintained as assets.
Results presentation
The result is calculated according to the accrual principle, matching expenses and revenues to the fiscal year to which they relate. Valuation methods remain consistent from one fiscal year to the next.
Going concern assumption: indicators that may challenge it
Several warning signs should alert managers and accounting professionals to a potential challenge to the going concern assumption. These indicators can be financial, operational, or legal in nature.
Financial indicators
- Negative equity or equity below one quarter of the share capital
- Recurring operating losses over several consecutive fiscal years
- Inability to meet debt obligations when they fall due
- Refusal of credit by banking institutions
- Structurally negative cash flow
Operational indicators
- Loss of major clients or significant contracts
- Departure of key managers or employees
- Technological obsolescence of production equipment
- Excessive dependence on a single supplier
Legal indicators
- Significant ongoing litigation that could jeopardize the company
- Non-renewal of licenses or authorizations required for the business
- Recovery proceedings initiated by major creditors
Role of the statutory auditor in assessing going concern
The statutory auditor (commissaire aux comptes) plays a central role in assessing going concern. As part of the legal audit engagement, the auditor must evaluate whether the going concern assumption adopted by management is appropriate.
During audit planning and execution, the statutory auditor gathers sufficient audit evidence to support the assessment. This includes analysing cash flow forecasts, examining debt refinancing conditions, and evaluating the company’s ability to generate positive cash flows.
If the statutory auditor identifies a material uncertainty related to going concern, it must be reflected in the audit report. Depending on the severity of the situation, the auditor’s opinion may take different forms: an emphasis of matter paragraph, a qualified opinion, or in the most serious cases, a disclaimer of opinion.
The alert procedure: a preventive mechanism
Moroccan law grants the statutory auditor not only the right but the duty to raise an alert when facts are identified that could compromise going concern. This procedure, governed by the Commercial Code and reinforced by Law No. 73-17 on corporate difficulties, unfolds in several stages.
- First stage: the statutory auditor informs the company manager by registered letter with acknowledgment of receipt of the identified facts, within eight days of their discovery. The auditor requests that the situation be rectified.
- Second stage: if the situation has not been remedied within fifteen days of receipt of the letter, or if the head of the business obtains no positive result personally or after deliberation by the board of directors or supervisory board, they must have the general meeting deliberate within fifteen days, on the report of the statutory auditor if one exists.
- Third stage: if the general meeting does not deliberate, or if despite the decisions taken the going concern remains compromised, the statutory auditor informs the president of the commercial court.
This alert procedure constitutes an essential safety net to protect the interests of shareholders, creditors, and employees.
Cessation of activity: what to do?
The going concern principle conditions the application of other accounting principles, methods, and rules. When the conditions for a total or partial cessation of activity are met:
- Abandon the going concern assumption: the company ceases to apply standard valuation methods
- Prepare accounts on a liquidation or disposal basis: all assets and liabilities are restated at their realizable values
As a consequence, this situation calls into question the following principles:
- Consistency of methods
- Historical cost
- The accrual principle (matching principle)
Accounting treatment when going concern is abandoned
Where the conditions for a total or partial cessation of activity are met, the CGNC requires a liquidation or disposal assumption and the corresponding values. Valuation takes account of the expected disposal conditions and does not systematically assume a forced sale. The methods used are disclosed in the ETIC.
Specifically, the company must:
- Reverse all deferred charges that were expected to generate future benefits
- Make provisions for assets to reflect their potential disposal value: tangible fixed assets, inventories, and receivables based on their probability of collection
- Increase its liabilities to account for potential severance payments and tax risks that liquidation may generate
Liquidation values vs going concern values
The difference between going concern values and liquidation values can be substantial. A high-performing production tool may have significant value in use under the going concern assumption, but its resale value on the secondary market would be much lower. Similarly, goodwill whose value is based on the customer base and know-how loses most of its value in the event of liquidation.
Link to Law 73-17 on corporate difficulties
Law No. 73-17, which repealed and replaced Book V of the Commercial Code, modernized the legal framework applicable to companies in difficulty in Morocco. It establishes three types of proceedings: safeguard, judicial reorganization, and judicial liquidation.
Safeguard proceedings may be opened at the request of a business that is not in cessation of payments but faces business difficulties it cannot overcome and which may lead to such cessation in the near future. The application must include a draft safeguard plan under Articles 561 and 562 of the Commercial Code. This procedure aims to enable the continuation of activities, maintain employment, and settle liabilities.
The link between the accounting going concern assessment and corporate difficulty proceedings is direct: it is often the accounting evaluation of going concern that triggers or accompanies recourse to the judicial procedures provided by Law 73-17.
Practical examples of going concern challenges
Example 1: an industrial company accumulates losses over three consecutive fiscal years. Its equity falls below one quarter of the share capital. The statutory auditor triggers the alert procedure. Where losses reduce net equity below one quarter of capital, members must decide on early dissolution under the rules for the relevant legal form. If activity continues, regularization may take the form of restoring equity or reducing capital under the statutory conditions and deadlines.
How the one-quarter threshold is calculated, the procedure and the deadlines are detailed in our article on equity below one quarter of the share capital.
Example 2: a commercial enterprise loses its main client, who represented 60% of its revenue. Despite efforts to find new markets, the short-term replacement outlook is uncertain. The statutory auditor assesses the impact of the loss of the client on going concern and the information disclosed in the ETIC. If the doubts are properly described and maintaining the going concern assumption remains justified, an unqualified opinion with an emphasis of matter paragraph may be appropriate. A qualified or adverse opinion depends on the circumstances and their reflection in the accounts.
Example 3: a Moroccan SME is hit by a major tax reassessment that exceeds its payment capacity. If it is not in cessation of payments and meets the conditions of Article 561 of the Commercial Code, the business may request safeguard proceedings, submitting in particular a draft plan to settle liabilities. The court decides whether to open proceedings.
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Frequently asked questions
What does going concern mean in Moroccan accounting?
Going concern is a fundamental accounting principle in Morocco stating that a company is presumed to continue operating for the foreseeable future without the intention or necessity to liquidate or significantly reduce its operations. This assumption underlies the preparation of financial statements under the CGNC and affects how assets and liabilities are valued.
Who is responsible for assessing going concern in Morocco?
Both company management and the statutory auditor share responsibility for assessing going concern. Going concern is assessed when the accounts are finalized, taking account of factors that may affect the continuation of activity for the foreseeable future. The period considered is generally the financial year following the reporting date, but known factors whose effects will occur beyond that period must also be considered. The statutory auditor independently assesses this assumption. Where the head of the business does not remedy on their own initiative facts liable to compromise operations, the statutory auditor, if one exists, or any member informs them under the internal prevention procedure in Article 547 of the Commercial Code.
What happens when going concern is questioned for a Moroccan company?
When going concern is questioned, several consequences follow depending on the severity of the situation. Where the head of the business does not remedy on their own initiative facts liable to compromise operations, the statutory auditor, if one exists, or any member informs them under the internal prevention procedure in Article 547 of the Commercial Code. The audit report reflects the assessment of going concern. Where losses reduce net equity below one quarter of capital, members must decide on early dissolution under the rules for the relevant legal form. If activity continues, regularization may take the form of restoring equity or reducing capital under the statutory conditions and deadlines. In more critical cases, the company may initiate safeguard or judicial reorganization proceedings under Law 73-17 to preserve its operations while negotiating with creditors.
