How the going concern assessment and disclosures work under IAS 1 and ASC 205-40

Every set of financial statements prepared under IFRS or US GAAP rests on the assumption that the entity will keep operating for the foreseeable future, so that assets are recovered and liabilities settled in the normal course of business. Most of the time that assumption is not in question and nobody writes a word about it. The going concern assessment becomes visible only when something goes wrong: losses that consume cash, a covenant breach, a refinancing that has not been agreed, a key customer lost, or a funding round that has not closed.

When that happens, management has to perform a documented assessment, decide whether the doubts are serious enough to require disclosure, and decide whether management's own plans can be counted as mitigating the problem. IFRS and US GAAP agree on the broad idea, but they differ on the look-forward period, on the threshold that triggers disclosure, on the way management's plans are evaluated and on the wording that appears in the notes. Those differences matter in practice, because the same entity, on the same facts, can reach a different disclosure outcome depending on which framework it reports under.

This article explains how the assessment works under IAS 1 and under Subtopic 205-40 of the FASB Codification, how it interacts with the classification of debt after a covenant breach, and how a worked example with a quarterly cash forecast and journal entries plays out under both frameworks.

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WHEN THE GOING CONCERN QUESTION ARISES.

Under both frameworks the going concern basis is the default. Financial statements are prepared on that basis unless management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so under IFRS, or unless liquidation is imminent under US GAAP, where the liquidation basis of Subtopic 205-30 then applies. A doubt about going concern does not, by itself, change the basis of preparation. It changes the disclosures.

The assessment is triggered by events and conditions that cast doubt on the entity's ability to meet its obligations. The FASB lists examples of adverse conditions in its implementation guidance, grouped into negative financial trends, other indications of financial difficulty, internal matters and external matters. Typical cases are recurring operating losses, negative operating cash flows, working capital deficiencies, defaults or covenant breaches on loan agreements, denial of trade credit, loss of a principal customer or supplier, and the need to restructure debt or obtain new financing. The presence of one of these conditions does not decide the outcome on its own; it obliges management to perform and document the evaluation.

The question also arises at different points in the reporting cycle. US GAAP explicitly requires the evaluation for each annual and interim reporting period. Under IFRS the assessment is made whenever financial statements are prepared, and events after the reporting period have to be taken into account up to the date the statements are authorised for issue. The site's earlier article on subsequent events after the balance sheet date covers that wider topic.

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THE IFRS TREATMENT.

Under IAS 1 management makes an assessment of the entity's ability to continue as a going concern when preparing financial statements. The assessment takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The factors management may need to consider include current and expected profitability, the timetable of debt repayments and potential sources of replacement financing. IAS 10 adds that the assessment must reflect events after the reporting period up to the date of authorisation, and that if management decides after the reporting period that it intends to liquidate or cease trading, or has no realistic alternative but to do so, the statements must not be prepared on a going concern basis.

The IFRS Foundation's educational material on going concern describes the possible outcomes as a sequence of scenarios rather than a single test. Where there is no significant doubt, the entity simply prepares the statements on the going concern basis. Where significant doubt exists but management concludes, after considering its plans and other mitigating factors, that no material uncertainty remains, the conclusion may itself involve significant judgement. In that case the 2014 agenda decision of the IFRS Interpretations Committee points to the requirement in IAS 1 to disclose the judgements that have the most significant effect on the amounts recognised. Where material uncertainties remain, the entity must disclose those uncertainties, the events or conditions that cast doubt and, in practice, management's plans to deal with them. Where the entity is not a going concern, it must disclose that fact, the reason and the basis on which the statements are prepared; IFRS does not prescribe an alternative basis.

Two structural points are worth noting. First, IFRS has no defined probability threshold for a material uncertainty; it is a judgement about whether the uncertainty is significant enough that users need to know about it. Second, the location of the requirements is changing. IFRS 18 Presentation and Disclosure in Financial Statements, effective for annual periods beginning on or after 1 January 2027, moves the going concern requirements unchanged from IAS 1 into IAS 8, which is retitled Basis of Preparation of Financial Statements. The substance of the assessment does not change, but references in accounting manuals and audit files will need updating.

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THE US GAAP TREATMENT.

Subtopic 205-40, introduced by ASU 2014-15 and effective for annual periods ending after 15 December 2016, places the responsibility for the evaluation explicitly on management and defines the test more precisely than IFRS. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued, or are available to be issued where that date applies. "Probable" carries the same meaning as in the contingencies guidance of Topic 450: the future event is likely to occur.

The evaluation runs in two steps. In the first step, management assesses whether conditions and events raise substantial doubt without taking into account the mitigating effect of plans that have not been fully implemented at the issuance date. Only information that is known or reasonably knowable at that date counts. If substantial doubt is raised, the second step considers management's plans. A plan alleviates substantial doubt only if it is probable that it will be effectively implemented within the one-year period and probable that, once implemented, it will mitigate the relevant conditions within that period. Feasibility generally requires that the plan has been approved by management or others with appropriate authority before the issuance date. Plans that are not probable of effective implementation are disregarded, and a plan to meet obligations through liquidation can never alleviate substantial doubt.

The disclosure outcome follows from the two steps. If substantial doubt is never raised, no going concern note is required. If it is raised but alleviated by management's plans, the entity discloses the principal conditions or events that raised the doubt, management's evaluation of their significance and the plans that alleviated it. If it is not alleviated, the entity must state in the notes that there is substantial doubt about its ability to continue as a going concern within one year after the date the statements are issued, together with the same three items, with the plans described as plans intended to mitigate the conditions. In later periods the disclosures continue and are expanded while the conditions persist, and when substantial doubt no longer exists the entity explains how the conditions were resolved.

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IFRS VS US GAAP COMPARISON.

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Aspect	IFRS (IAS 1, IAS 10)	US GAAP (ASC 205-40)
Look-forward period	At least 12 months from the reporting date, not limited to it	One year after the issuance date
Disclosure trigger	Material uncertainty, no defined threshold	Substantial doubt, "probable" threshold
Management's plans	Considered within an overall judgement	Two-step test, plans must be probable of implementation and mitigation
Doubt resolved by plans	Significant judgement disclosure where relevant	Specific disclosures required
Doubt not resolved	Disclose material uncertainties	Explicit "substantial doubt" statement
Frequency	Whenever statements are prepared	Each annual and interim period
Not a going concern	Disclose fact and basis used	Liquidation basis if liquidation imminent

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THE LINK WITH COVENANT BREACHES AND DEBT CLASSIFICATION.

Going concern assessments very often start with a breached loan covenant, and the classification of the loan on the balance sheet is one of the places where the two frameworks diverge most visibly. IAS 1 states that when an entity breaches a covenant of a long-term loan arrangement on or before the end of the reporting period, with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agrees after the reporting period, and before authorisation of the statements, not to demand payment as a consequence of the breach. A waiver obtained after the year end can support the going concern conclusion, but it cannot change the classification.

US GAAP looks at the same situation differently. Under the debt guidance in ASC 470-10, long-term debt that is callable because of a covenant violation at the balance sheet date is classified as current unless the creditor has waived or subsequently lost the right to demand repayment for more than one year from the balance sheet date, and a waiver obtained before the statements are issued can be taken into account. The same guidance also requires current classification where a waiver is obtained but it is probable that the entity will fail to meet the covenant at a later measurement date within the following year. Readers who want the background on how covenants are written and tested can refer to how financial covenants are structured and monitored in debt agreements and to the reporting implications of debt covenants.

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WORKED EXAMPLE: A COVENANT BREACH AND A TWELVE-MONTH CASH FORECAST.

The following example is illustrative. Amounts are in thousands of currency units (CU). An entity reports for the year ended 31 December 2026. It has a term loan of CU 20,000 at 8% interest, repayable in quarterly instalments of CU 500, so CU 2,000 falls due in 2027. Before year-end classification the whole loan sits in non-current borrowings. At 31 December 2026 the entity breaches its leverage covenant, which makes the loan payable on demand. On 20 February 2027 the lender grants a waiver of the breach until 31 March 2028, which is more than one year after the balance sheet date. The financial statements are authorised for issue on 15 March 2027.

Cash at 31 December 2026 is CU 3,500. Management's base forecast shows seasonal operating outflows in the first half of 2027, capital expenditure of CU 250 per quarter, interest computed on the opening loan balance of each quarter and the scheduled repayments. Because the US GAAP window runs to one year after the issuance date, the forecast is extended to the first quarter of 2028. Management also has two plans: the sale of a warehouse for CU 2,500, approved by the board and supported by a purchase agreement signed in February 2027 with completion expected in the second quarter, and an equity raise of CU 3,000 that has not yet been approved by the board.

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Quarter	Opening cash	Operating cash flow	Capex	Interest	Loan repayment	Closing cash
Q1 2027	3,500	-900	-250	-400	-500	1,450
Q2 2027	1,450	-400	-250	-390	-500	-90
Q3 2027	-90	300	-250	-380	-500	-920
Q4 2027	-920	600	-250	-370	-500	-1,440
Q1 2028	-1,440	200	-250	-360	-500	-2,350

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Without any mitigating plans, cash turns negative in the second quarter of 2027 and the shortfall reaches CU 2,350 by the end of March 2028. Under Subtopic 205-40 this is the first step of the evaluation, performed without the plans, and it raises substantial doubt. Under IFRS the same forecast casts significant doubt that management has to address.

The second step adds the warehouse sale. The equity raise is excluded, because it has not been approved and there is no basis to conclude that it is probable of effective implementation.

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Quarter	Opening cash	Net flows before sale	Warehouse sale	Closing cash
Q1 2027	3,500	-2,050	0	1,450
Q2 2027	1,450	-1,540	2,500	2,410
Q3 2027	2,410	-830	0	1,580
Q4 2027	1,580	-520	0	1,060
Q1 2028	1,060	-910	0	150

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With the sale, closing cash stays positive in every quarter, with a minimum of CU 150 at the end of March 2028. Under US GAAP, if management concludes that the sale is probable of completion in the second quarter and that it mitigates the shortfall, substantial doubt is alleviated and the entity gives the disclosures for that case: the conditions that raised the doubt (the covenant breach and the forecast cash shortfall), management's evaluation of their significance, and the plan that alleviated it. Under IFRS management would most likely conclude that no material uncertainty remains, but that the conclusion involves significant judgement, which calls for disclosure of that judgement. The very thin headroom in the first quarter of 2028 is exactly the kind of fact that makes the judgement significant, and it would also be relevant to disclosures of estimation uncertainty.

The classification of the loan differs. Under IFRS the breach at the reporting date makes the whole loan current, and the February waiver does not change that. Under US GAAP the waiver, obtained before issuance and covering more than one year from the balance sheet date, allows the loan to remain non-current except for the instalments due in 2027, assuming it is not probable that the covenant will be breached again at a measurement date within the next twelve months.

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Framework	Account	Debit	Credit
IFRS	Borrowings, non-current	20,000
IFRS	Borrowings, current		20,000
US GAAP	Borrowings, non-current	2,000
US GAAP	Borrowings, current		2,000

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Each entry balances, and neither affects profit or loss: the going concern conclusion and the covenant breach change classification and disclosure, not the measurement of the loan. The effect on presentation is still significant. Under IFRS current liabilities increase by CU 20,000, which sharply lowers ratios such as the current ratio, while under US GAAP they increase by CU 2,000. The ratio mechanics are explained in the site's article on liquidity ratios.

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PRESENTATION AND DISCLOSURE IN PRACTICE.

A useful going concern note is specific. It identifies the conditions that created the doubt, quantifies them where possible, explains the plans that management relies on, states whether those plans are within management's control, and describes what happens if they fail. Under US GAAP the wording is partly prescribed when substantial doubt is not alleviated, and the phrase "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" carries a specific meaning for lenders and investors. Under IFRS the note must make clear whether a material uncertainty exists; a vague description of risks that never states the conclusion does not meet the objective.

The going concern disclosures also need to be consistent with the rest of the report: the debt note, the covenant disclosures, the liquidity risk disclosures under IFRS 7, the subsequent events note and, where relevant, impairment assumptions that rely on the same cash forecasts. Inconsistencies between a confident going concern statement and pessimistic impairment cash flows are a frequent source of regulator and auditor challenge.

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COMMON ERRORS AND JUDGEMENT AREAS.

The most frequent error under US GAAP is counting plans too early. Board approval that comes after the issuance date, a refinancing that is only under discussion, or an equity raise without committed investors does not meet the probable threshold, and the first step must always be performed without the plans. Under IFRS the equivalent error is concluding that there is no material uncertainty without disclosing the significant judgement behind that conclusion.

Other judgement areas recur. The look-forward period is a minimum under IFRS, so known events shortly after twelve months, such as a large bullet repayment, cannot be ignored. Forecasts need realistic downside scenarios, not only a base case, and the assumptions should be the same ones used elsewhere in the financial statements. Group support letters from a parent need to be assessed for the parent's own ability to provide the support. Interim reporting requires a fresh evaluation, not a roll-forward of the annual conclusion. Covenant waivers need to be read carefully: their duration, conditions and any future measurement dates determine both the classification under each framework and the strength of the going concern conclusion.

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PRACTICAL CHECKLIST.

Management and preparers working through a going concern assessment can use the following sequence. Identify the conditions and events that could cast doubt, using the categories of adverse conditions as a prompt. Set the look-forward period correctly: at least twelve months from the reporting date under IFRS, and one year from the issuance date under US GAAP. Build a cash forecast with base and downside scenarios that reconciles to budgets and impairment models. Under US GAAP, perform the first step without unimplemented plans and document whether substantial doubt is raised. Evaluate each plan for approval, feasibility, timing and magnitude, and exclude plans that are not probable. Check covenant positions at the reporting date and at future measurement dates, and determine debt classification separately under each framework. Draft the disclosure for the specific outcome reached, and make sure it is consistent with debt, liquidity and subsequent events notes. Update the assessment for events up to the date the statements are authorised or issued.

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WHAT IS SETTLED AND WHAT REMAINS A MATTER OF JUDGEMENT.

The mechanics are settled. Both frameworks presume the going concern basis, both require management to assess it using all available information, and both require disclosure when doubts are significant. US GAAP adds a defined probability threshold, a two-step test for management's plans, a look-forward period measured from the issuance date and prescribed disclosure content. IFRS relies on a broader judgement about material uncertainty, requires a minimum twelve-month horizon from the reporting date and, through the 2014 agenda decision, expects disclosure of significant judgements even when no material uncertainty is concluded. From 2027 the IFRS requirements sit in IAS 8 rather than IAS 1, with unchanged substance.

What remains a matter of facts and circumstances is almost everything that determines the outcome: whether a plan is probable, how much headroom is enough, how far beyond twelve months known events must be considered, and how a waiver's terms affect both classification and the conclusion. As the worked example shows, a covenant breach can lead to the whole loan being presented as current under IFRS while only the scheduled instalments are current under US GAAP, on identical facts, and the going concern note in both cases depends on judgements that have to be documented and disclosed.

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