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Going concern

The going concern assumption is a core principle in financial reporting that presumes an entity will remain in operation for the foreseeable future—typically at least 12 months from the end of the reporting period—without being forced to liquidate assets or cease trading, unless management intends otherwise or has no realistic alternative.^[1] This assumption underpins the preparation of financial statements under both International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), enabling the use of historical cost accounting and accrual basis rather than liquidation values. Under IFRS, as outlined in IAS 1 Presentation of Financial Statements, management is required to assess the entity's ability to continue as a going concern at each reporting date, considering all available information about future events, including any material uncertainties that may cast significant doubt on this ability.^[1] Similarly, U.S. GAAP, per ASC 205-40 introduced by FASB Accounting Standards Update (ASU) No. 2014-15, mandates that management evaluate whether substantial doubt exists about the entity's capacity to continue operations for a reasonable period of time, defined as at least one year after the date the financial statements are issued (or available to be issued).^[2] These assessments involve analyzing factors such as financial condition, liquidity, debt covenants, profitability trends, and external market conditions to determine if the going concern basis remains appropriate.^[2] If substantial doubt arises but is alleviated by management's plans—such as obtaining additional financing, restructuring debt, or reducing expenses—disclosure is still required to inform users of the risks and mitigation strategies.^[2] Under IFRS, material uncertainties require disclosure even if management expects they will be alleviated.^[1] Conversely, if the going concern basis is deemed inappropriate, financial statements must be prepared on a different basis (e.g., liquidation), with explicit disclosure of the change and its reasons.^[1] Auditors play a critical role in evaluating management's assessment, ensuring compliance, and highlighting any going concern issues in their reports, which enhances the transparency and reliability of financial information for investors, creditors, and other stakeholders.^[3] While IFRS and U.S. GAAP align on the core presumption and assessment period, subtle differences exist, such as IFRS's emphasis on "material uncertainties" versus U.S. GAAP's focus on "substantial doubt," influencing how entities report risks in global operations.^[4] In May 2025, the IFRS Foundation updated its educational material on going concern to reference the revised International Standard on Auditing (ISA) 570 (2024).^[5]

Fundamentals

Definition

The going concern principle is a fundamental assumption in accounting that posits an entity will continue its operations for the foreseeable future without the intention or necessity to liquidate its assets or cease trading. Under this concept, financial statements are prepared on the basis that the entity remains in business indefinitely, enabling the valuation of assets and liabilities at their ongoing use values rather than liquidation prices. This presumption forms the default basis for financial reporting unless substantial doubt arises about the entity's ability to continue as a going concern.^[6] The key rationale for the going concern assumption lies in its support for accrual-based accounting, which recognizes revenues and expenses when they are earned or incurred, rather than solely when cash is exchanged. This matching principle allows for a more accurate depiction of an entity's financial performance and position over time, as it aligns costs with the periods in which related benefits are realized. Without this assumption, financial statements would need to be prepared on a liquidation basis, potentially distorting economic reality by undervaluing assets intended for continued use.^[7] The principle applies broadly to various entities, including for-profit companies, non-profit organizations, and government bodies, unless specific evidence indicates otherwise, such as management's intent to dissolve the entity. The assessment period for the foreseeable future varies by standard; under IFRS, it is at least 12 months from the end of the reporting period, while under U.S. GAAP, it is generally one year from the date the financial statements are issued (or available to be issued). Management must evaluate conditions and events that could cast significant doubt on continuation beyond these minimum periods.^[6]^[8]

Historical Development

The going concern principle traces its origins to the nineteenth century, when accountants began distinguishing between the liquidation value of assets and their value as part of an ongoing business operation, a concept known as "going-concern value." This emerged amid rapid industrial expansion in Europe and the United States, where business continuity became central to valuation practices, allowing for the deferral of asset realizations and the recognition of long-term economic benefits. By the early twentieth century, the assumption had solidified in major accounting handbooks and textbooks, serving as a foundational axiom for preparing financial statements that presume indefinite operational continuity rather than imminent dissolution.^[9] The principle gained formal recognition in U.S. accounting during the 1930s, a period marked by the Great Depression's economic turmoil, which underscored the need for reliable financial reporting amid widespread business failures. In 1938, a seminal statement by accounting scholars T. Henry Sanders, Henry Rand Hatfield, and Underhill Moore emphasized the going concern as a key convention, stating that financial statements are prepared assuming the business will continue operating normally. This laid the groundwork for its integration into professional standards. By 1953, the Committee on Accounting Procedure of the American Institute of Accountants (predecessor to the AICPA) codified the assumption in Accounting Research Bulletin No. 43, explicitly noting that statements of a going concern are based on the expectation of continued business operations, influencing asset valuation, depreciation, and liability recognition.^[10] Internationally, the principle was embedded in the UK's Companies Act 1948, which mandated that company accounts be prepared to provide a true and fair view, implicitly requiring the going concern basis to reflect ongoing operations unless otherwise indicated. The 1970s brought further evolution through inflation accounting debates in both the U.S. and UK, where high inflation rates—reaching double digits—challenged the assumption's reliance on historical costs and stable continuity, prompting discussions on adjusting financial reporting for economic volatility while preserving the core principle.^[11]^[12] In modern standardization, the International Accounting Standards Committee issued IAS 1 Presentation of Financial Statements in 1997, formally requiring entities to prepare financial statements on a going concern basis unless management intends to liquidate or cease operations, or has no realistic alternative, and to disclose any material uncertainties affecting continuity. Subsequent revisions, such as in 2003 and 2007, refined these requirements for global consistency. In May 2025, the IFRS Foundation updated its educational material on going concern to reflect revisions in ISA 570 (2024), promoting consistent application and enhanced transparency in assessments and disclosures.^[13] In the United States, the Financial Accounting Standards Board (FASB) addressed ongoing needs by issuing ASU 2014-15, which updated ASC 205-40 to clarify management's responsibilities in evaluating and disclosing substantial doubts about an entity's ability to continue as a going concern, enhancing transparency post-financial crises.^[14]

Accounting Principles

Core Assumption

The going concern assumption serves as one of the foundational principles in accounting frameworks, alongside the accrual basis, consistency, and materiality assumptions, forming the bedrock for preparing financial statements under both US GAAP and IFRS.^[15]^[16] Without this assumption, financial reporting shifts to a liquidation basis, where the entity is presumed to be winding down operations rather than continuing indefinitely.^[13] Theoretically, the going concern assumption underpins historical cost accounting by positing that assets and liabilities will persist in generating future economic benefits over their useful lives, allowing for deferred recognition of costs like depreciation and amortization rather than immediate write-downs to liquidation values.^[17] This presumption enables a stable valuation model that reflects ongoing operational utility, avoiding the volatility of forced-sale pricing in routine reporting.^[18] Exceptions arise when the assumption no longer holds, such as when management intends to liquidate the entity, cease trading, or has no realistic alternative to continuation; in these cases, financial statements must adopt a liquidation basis, stating assets at their estimated net realizable values and liabilities at settlement amounts.^[19] The going concern assumption interlinks with other core principles, notably the matching principle, which facilitates the allocation of expenses to the periods in which they contribute to revenue generation under ongoing operations, and the accrual basis for recognizing revenues and expenses when earned or incurred, rather than on a cash basis.^[17]^[20] This integration ensures coherent application across the accounting model, promoting reliability in depicting an entity's financial position and performance.^[8] It has been codified in international standards such as IAS 1 under IFRS and ASC 205-40 under US GAAP.^[13]^[21]

Financial Statement Implications

The going concern assumption forms the foundation for preparing financial statements, presuming that an entity will continue its operations for the foreseeable future without the need to liquidate assets or cease trading. Under this basis, financial statements are structured to reflect ongoing business activities rather than a wind-down scenario. For instance, revenues and expenses are recognized on an accrual basis, matching them to the periods in which they occur, rather than on a cash or settlement basis typical of liquidation. This assumption directly influences the overall presentation, ensuring that the balance sheet, income statement, and cash flow statement portray a sustainable entity capable of realizing assets and settling liabilities in the normal course of business.^[13] In terms of asset and liability valuation, the going concern principle dictates that assets are typically recorded at historical cost or amortized cost, assuming their continued use in operations, rather than at forced-sale or liquidation values. For example, property, plant, and equipment are depreciated over their useful lives based on ongoing utilization, and inventories are valued at the lower of cost or net realizable value under normal market conditions. Liabilities, meanwhile, are measured at the present value of expected future outflows, presuming settlement through ordinary operations rather than accelerated repayment. This approach avoids premature write-downs or discounts that would apply in a distress scenario, thereby presenting a more accurate depiction of the entity's economic resources and obligations.^[17]^[22] Disclosure requirements under major accounting standards mandate that management explicitly assess the entity's ability to continue as a going concern and disclose relevant information in the financial statement notes. Per IAS 1, management must evaluate going concern status for at least 12 months from the reporting date, disclosing any material uncertainties that may cast significant doubt on this ability, along with the principal events or conditions leading to them and management's plans to address them (IAS 1, paragraphs 25 and 122). Similarly, under US GAAP's ASC 205-40, management performs this assessment over a one-year period from the date of financial statement issuance, requiring disclosures of conditions giving rise to substantial doubt, management's evaluation, and prospective plans if doubt exists; if plans do not alleviate the doubt, an emphasis-of-matter paragraph is included stating the substantial doubt. In May 2025, the IFRS Foundation updated its educational material on going concern disclosures to incorporate revisions from International Standard on Auditing (ISA) 570 (Revised 2024), emphasizing enhanced transparency in assessments.^[8]^[17]^[5] These disclosures ensure users are informed of risks without altering the primary measurement basis unless doubt is unresolved. The assumption profoundly impacts key financial statements by aligning their components with ongoing operations. On the balance sheet, assets and liabilities are classified as current or non-current based on the operating cycle, without applying liquidation discounts that could undervalue assets or accelerate liability maturities. The income statement, in turn, employs accrual accounting to recognize revenues from continued sales and expenses tied to persistent activities, avoiding the recognition of one-time liquidation gains or losses. Cash flow statements similarly categorize flows from operating, investing, and financing activities under the presumption of continuity.^[17]^[23] If the going concern assumption is violated—such as when management intends to liquidate or has no realistic alternative—financial statements must be restated on a liquidation basis, fundamentally altering their preparation and presentation. Under IFRS, per IAS 1 paragraph 25 and IAS 10 paragraph 14, entities prepare statements on an alternative basis (often break-up or liquidation), writing assets down to their recoverable amounts (fair value less costs of disposal) and adjusting liabilities to expected settlement amounts, with disclosures explaining the departure, reasons, and effects on the statements. In US GAAP, ASC 205-30 requires adoption of the liquidation basis when liquidation is imminent, measuring assets at estimated net realizable values, accruing costs to sell or distribute, and recognizing changes that affect equity and retained earnings, such as impairment losses or gain/loss recognitions not applicable under going concern. This shift typically results in significantly lower asset values, accelerated liability settlements, and a restated equity position reflecting the entity's wind-down value.^[22]^[24]

Auditing and Assessment

Auditor Responsibilities

Auditors play a critical role in evaluating an entity's ability to continue as a going concern, ensuring that financial statements are prepared on an appropriate basis and free from material misstatement related to this assumption. Under International Standard on Auditing (ISA) 570 (revised 2009, with ISA 570 (Revised 2024) effective for audits beginning on or after December 15, 2026), auditors must obtain reasonable assurance about the appropriateness of management's use of the going concern basis of accounting and whether a material uncertainty exists that requires disclosure.^[25] The 2024 revision enhances risk assessment procedures, auditor reporting, and evaluation of management's plans. Similarly, in the United States, AU-C Section 570 requires auditors to evaluate whether substantial doubt exists about an entity's ability to continue as a going concern for a reasonable period, typically not exceeding one year beyond the financial statement date.^[26] These standards emphasize the auditor's responsibility to perform procedures throughout the audit to identify risks of material misstatement due to going concern issues. The audit procedures involve a structured risk assessment and evidence-gathering process. Auditors design and implement risk assessment procedures in accordance with ISA 315 (Revised 2019), including inquiries of management, analytical procedures, and reviews of financial and operational data to identify events or conditions that may cast significant doubt on the entity's going concern status, such as liquidity shortfalls or covenant breaches.^[27] They evaluate management's assessment by scrutinizing the methods, assumptions, and supporting data used in forecasts and budgets, often extending the evaluation period to at least 12 months from the expected approval date of the financial statements.^[27] Additional steps include analyzing debt compliance, assessing subsequent events, and corroborating management's plans—such as refinancing or asset sales—for feasibility and intent, with evidence obtained on any third-party support arrangements.^[26] Under AU-C 570, auditors remain alert for new information throughout the engagement and perform substantive procedures to confirm the adequacy of evidence on going concern matters.^[26] Reporting outcomes depend on the conclusions drawn from these procedures. If no material uncertainty exists, auditors issue an unmodified opinion and may include a dedicated "Going Concern" section in the audit report to describe their evaluation, enhancing transparency (required under the 2024 ISA revision).^[27] When substantial doubt remains but is adequately disclosed in the financial statements, auditors add an emphasis-of-matter paragraph or a "Material Uncertainty Related to Going Concern" section without modifying the opinion; however, inadequate disclosure leads to a qualified or adverse opinion.^[27] In U.S. audits, if substantial doubt is not alleviated by management's plans, an explanatory paragraph is required in the report.^[26] These reporting requirements align with broader audit reporting standards like ISA 700 and AU-C 700 to communicate the basis of the opinion clearly. Documentation is a fundamental aspect of fulfilling these responsibilities, ensuring the audit's quality and defensibility. Auditors must record the nature and extent of procedures performed, the evidence obtained, conclusions reached on the going concern basis, and any communications with those charged with governance, including evaluations of alternative plans if considered.^[27] Per ISA 230 and AU-C 230, this documentation supports the auditor's judgments and provides a basis for review in subsequent periods or inspections.^[26]

Going Concern Indicators

Going concern indicators are observable financial, operational, and external factors that may signal substantial doubt about an entity's ability to continue as a going concern for a reasonable period, typically at least one year from the financial statement date.^[3] These indicators, outlined in auditing standards such as PCAOB AS 2415 and ISA 570, serve as diagnostic tools rather than definitive proof of failure, requiring a holistic assessment that integrates both quantitative metrics and qualitative judgments.^[25]^[3] Financial indicators often highlight liquidity and solvency pressures, including recurring operating losses, negative cash flows from operations, adverse key financial ratios such as high debt-to-equity, working capital deficiencies, defaults on loan agreements, and breaches of debt covenants.^[3]^[25] For instance, substantial dependence on short-term financing or the inability to secure additional funding can exacerbate these issues, as seen in banks during the 2008 financial crisis where deteriorating asset values and liquidity squeezes led to widespread covenant violations and going concern uncertainties.^[28] These metrics provide quantifiable evidence but must be contextualized with trends over multiple periods to avoid misinterpretation.^[3] Operational indicators reflect internal disruptions that undermine business continuity, such as loss of key customers or suppliers, labor disputes or work stoppages, dependence on a single project or uneconomic long-term commitments, and the inability to replace essential assets without significant financial strain.^[3]^[25] Qualitative aspects, like the sudden departure of critical management or shortages of vital supplies, can compound these risks by eroding operational efficiency and expertise.^[25] Unlike purely financial signals, operational factors often require deeper inquiry into management plans and contingency measures for accurate evaluation.^[3] External indicators encompass macroeconomic, industry, or regulatory pressures beyond the entity's direct control, including industry-wide declines, adverse regulatory changes, legal proceedings, loss of key franchises or patents, and events like recessions or natural disasters that increase uninsured risks.^[3]^[25] Technological shifts rendering products obsolete or withdrawal of creditor support in turbulent markets are additional examples that can trigger going concern doubts.^[25] In the 2008 crisis, for banks, external factors such as collapsing housing markets and heightened credit risk amplified internal vulnerabilities, illustrating how systemic events can rapidly intensify going concern threats.^[28] Auditors are required to identify and assess these indicators during the audit process to determine if substantial doubt exists, integrating them into the overall evaluation of the entity's viability.^[3]^[25] A balanced approach weighing quantitative data against qualitative insights ensures comprehensive risk identification without overreliance on isolated metrics.^[3]

Applications and Implications

Risk Management Integration

The integration of going concern assessments into enterprise risk management (ERM) frameworks ensures that potential threats to business sustainability are systematically identified, evaluated, and mitigated as part of broader organizational risk processes. In the COSO Enterprise Risk Management—Integrating with Strategy and Performance framework (2017), going concern risks are treated as a core component of financial and operational risks, requiring organizations to align these assessments with strategic objectives by incorporating them into risk registers that catalog strategic, operational, reporting, and compliance risks. This alignment helps entities anticipate and address conditions that could impair their ability to operate for at least 12 months, embedding going concern evaluation within the overall ERM cycle of risk identification, assessment, response, and monitoring. Similarly, the ISO 31000:2018 Risk Management Guidelines supports this integration by providing principles for managing financial risks, including those affecting continuity, through a structured process that emphasizes context establishment and risk treatment plans tailored to organizational viability.^[29] Scenario planning plays a pivotal role in this integration, employing stress testing and contingency planning to simulate adverse conditions and evaluate the entity's viability over periods exceeding 12 months. Under ERM practices, management develops multiple scenarios—such as economic downturns, supply chain disruptions, or revenue declines—to model cash flows, liquidity positions, and operational resilience, often using reverse stress testing to identify the precise triggers that could lead to failure.^[30] These exercises, aligned with frameworks like COSO, inform contingency actions like cost reductions or asset sales, ensuring proactive mitigation of going concern doubts identified through indicators such as declining liquidity. The Financial Reporting Council (FRC) guidance emphasizes this approach, recommending flexible risk strategies that incorporate scenario analysis to support robust viability judgments. Board oversight, particularly through audit committees, reinforces the embedding of going concern risks within ERM by providing independent monitoring and challenge to management's assessments. Audit committees review risk registers and stress test outcomes alongside other enterprise risks, ensuring alignment with strategic goals and escalating issues to the full board when substantial doubts arise.^[31] This oversight role extends to verifying the adequacy of internal controls over financial reporting that underpin going concern evaluations, as outlined in COSO principles.^[32] Key risk indicators (KRIs) such as liquidity ratios are essential for ongoing monitoring of going concern risks within ERM, providing quantifiable thresholds to trigger alerts and responses. Metrics like the current ratio (current assets divided by current liabilities) and quick ratio (excluding inventory) are tracked to gauge short-term solvency, with adverse trends—such as ratios below 1.0—signaling potential liquidity shortfalls that could jeopardize continuity.^[17] These KRIs are integrated into dashboards and periodic reporting under ERM frameworks, enabling timely adjustments to risk responses and supporting the 12-month forward-looking assessment required for viability.^[33]

Legal and Regulatory Aspects

In the United States, the Sarbanes-Oxley Act of 2002 (SOX) imposes significant legal obligations on corporate executives regarding financial reporting, including the implicit assumption of going concern embedded in financial statements prepared under U.S. GAAP. Under Section 302 of SOX, the chief executive officer (CEO) and chief financial officer (CFO) must certify that quarterly and annual reports fairly present, in all material respects, the company's financial condition and results of operations in accordance with GAAP, which requires preparation on a going concern basis unless liquidation is intended.^[34] This certification extends to the effectiveness of internal controls over financial reporting, ensuring that going concern assessments are properly evaluated and disclosed if substantial doubt exists under ASC 205-40. The Securities and Exchange Commission (SEC) enforces these requirements, with violations potentially leading to civil penalties, officer and director bars, or criminal charges for false certifications. For instance, in the 2003 SEC action against Spiegel, Inc., executives were charged with fraud for delaying SEC filings to conceal an auditor's going concern qualification, resulting in misleading statements about the company's viability and eventual bankruptcy filing.^[35] Internationally, the European Union (EU) mandates going concern evaluations through its adoption of International Financial Reporting Standards (IFRS), particularly IAS 1 Presentation of Financial Statements, which has been endorsed under the IAS Regulation (EC) No 1606/2002. IAS 1 requires management to assess the entity's ability to continue as a going concern and prepare financial statements on that basis unless liquidation or cessation of trading is planned; if material uncertainties exist, they must be disclosed, including the potential impact on the financial statements.^[19] This contrasts with U.S. GAAP's more prescriptive two-step process under ASC 205-40, where management first identifies if substantial doubt exists based on conditions like negative cash flows, then evaluates mitigating plans; IFRS relies on broader judgment without such steps, potentially leading to earlier disclosures of uncertainties.^[4] In auditing contexts, U.S. standards under PCAOB AS 2415 permit an emphasis-of-matter paragraph in the audit report to highlight substantial doubt about going concern, whereas IFRS (via ISA 570) similarly allows but emphasizes integrated disclosure in the financial statements without a mandatory separate paragraph.^[3] Violations of going concern disclosure requirements can trigger severe consequences, including regulatory sanctions, civil lawsuits, and operational disruptions. In the U.S., failure to disclose substantial doubt may constitute misleading statements under Section 10(b) of the Securities Exchange Act of 1934, inviting SEC enforcement actions, shareholder class-action lawsuits for securities fraud, and potential delisting from exchanges like the NYSE if filings are repeatedly deficient.^[35] Such lapses can also accelerate bankruptcy proceedings under the U.S. Bankruptcy Code, where courts consider going concern value in Chapter 11 reorganizations but may convert to liquidation under Chapter 7 if viability is not demonstrated, as seen in cases where undisclosed doubts led to involuntary petitions. Internationally, non-compliance with IAS 1 in the EU can result in enforcement by national regulators, fines under the EU Market Abuse Regulation, or delisting from EU exchanges, underscoring the cross-jurisdictional risks of inadequate going concern evaluations. Post-2020, the Public Company Accounting Oversight Board (PCAOB) has enhanced its focus on incorporating emerging risks into going concern assessments under AS 2415. As of November 2025, while PCAOB inspections increasingly consider risks like those from economic and regulatory changes, specific integrations such as climate-related factors remain evaluated under broader audit standards if material to viability. This approach aligns with SEC's ongoing emphasis on disclosing material climate-related risks under existing frameworks, such as the 2010 guidance, though the 2024 climate disclosure rules—intended to standardize reporting of such risks—were stayed following adoption and the SEC ceased their defense in March 2025 due to legal challenges, without directly mandating their inclusion in going concern analyses but prompting consideration in high-risk industries like energy or manufacturing.^[36]^[37]

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