Last reviewed: July 2026.
The going concern concept is one of the basic decisions behind the preparation of financial statements. It assumes that an entity will continue operating for the foreseeable future and will realise assets and settle liabilities in the normal course of business.
What does going concern mean?
Going concern does not mean that the entity is guaranteed to survive indefinitely. It means that, after considering all available information, management concludes that using the normal basis of preparation remains appropriate.
The assumption affects how financial statements are prepared. Assets are normally measured and classified on the expectation that they will be used or realised through continuing operations, rather than sold immediately in a forced break-up. Liabilities are presented on the basis that the business will continue to meet them through its normal operating and financing cycle.
Where are the IFRS requirements?
The going concern requirements were historically found in IAS 1. IFRS 18 moved them unchanged into IAS 8, which is now titled Basis of Preparation of Financial Statements. IFRS 18 is effective for annual periods beginning on or after 1 January 2027. Before adoption, an entity may still apply the corresponding IAS 1 requirements for its reporting period.
IAS 10 is also important because the assessment must reflect relevant events occurring after the reporting date and before the financial statements are authorised for issue.
How far ahead must management assess?
Management considers all available information about the future and looks forward for at least 12 months from the end of the reporting period. The 12-month period is a minimum, not a maximum. Facts beyond that period may need to be considered when they could affect the conclusion.
The assessment is dynamic. If conditions deteriorate after the reporting date but before authorisation of the financial statements, management updates the assessment and the related disclosures. If the entity no longer has a realistic alternative to liquidation or ceasing trade, the going concern basis is no longer appropriate.
Common warning signs
No single indicator automatically proves that an entity is not a going concern. Management considers the combined effect of financial, operating and external factors, including:
- recurring operating losses or negative operating cash flows;
- working-capital deficits and difficulty paying suppliers, employees or taxes on time;
- loan maturities, covenant breaches or withdrawal of borrowing facilities;
- loss of a major customer, supplier, licence, market or key management personnel;
- inability to obtain essential finance or replace expiring facilities;
- significant litigation, regulatory action or uninsured losses;
- major changes in technology, customer behaviour or market demand; and
- dependence on financial support that is not committed or not realistically available.
How should mitigating actions be assessed?
Management may plan actions such as refinancing debt, obtaining owner support, reducing costs, selling assets, renegotiating contracts or changing the scale of operations. The assessment should not merely list these plans. It should evaluate whether they are feasible, sufficiently advanced, legally available and likely to be effective within the required timeframe.
For example, an unsigned financing proposal is weaker evidence than a committed facility from a creditworthy lender. A planned asset sale is less persuasive when the asset is difficult to sell quickly or is already pledged as security.
Four practical going concern scenarios
| Scenario | Basis of preparation | Typical disclosure focus |
|---|---|---|
| Profitable, stable operations with no significant doubts | Going concern | Normal basis-of-preparation disclosure; no special going concern uncertainty disclosure is usually necessary. |
| Significant doubts exist, but feasible mitigating actions remove material uncertainty | Going concern | Significant judgements may need disclosure, especially in a close-call situation. |
| Going concern remains appropriate, but material uncertainties remain | Going concern | Clear disclosure of the events or conditions and the material uncertainties that may cast significant doubt. |
| Management intends to liquidate or cease trading, or has no realistic alternative | Not going concern | Disclose that the going concern basis was not used, the alternative basis applied and the reasons. |
Worked example
Assume a company has made losses for two years and a major bank facility expires eight months after year-end. Management has negotiated a replacement facility, but the lender's final approval is conditional on the company meeting a sales target.
Management should test cash-flow forecasts, the sensitivity of those forecasts, the probability of meeting the sales condition and the availability of alternative funding. If the company can continue only if the conditional facility is approved, material uncertainty may remain. The notes should explain the funding expiry, the condition, management's plans and why the uncertainty may cast significant doubt on the company's ability to continue.
What should a useful disclosure contain?
A clear disclosure is entity-specific. Depending on the circumstances, it may describe:
- the principal events or conditions creating doubt;
- management's plans and the evidence supporting their feasibility;
- the period covered by the assessment;
- significant assumptions, sensitivities and sources of estimation uncertainty;
- the judgement made in a close-call conclusion;
- material uncertainties that remain after mitigating actions; and
- the alternative basis used when the entity is not a going concern.
Boilerplate language is not enough when users need to understand the severity of the risk and the dependence on management's actions.
Management checklist
- Prepare realistic cash-flow forecasts and downside scenarios.
- Review debt maturities, covenants and access to committed finance.
- Assess operational, legal, regulatory and market risks.
- Evaluate every mitigating action for feasibility and timing.
- Consider events up to the date the statements are authorised.
- Document the conclusion, significant judgements and evidence.
- Draft disclosures that are specific, balanced and consistent with other information in the financial statements.
Frequently asked questions
Does a current ratio below 1 automatically mean the company is not a going concern?
No. It is a warning indicator, not a conclusion. The assessment also considers cash flows, the operating cycle, financing arrangements, industry practices and management's realistic plans.
Is the assessment limited to 12 months?
No. IFRS requires consideration of at least 12 months from the reporting date, but information beyond that period is considered when relevant.
Can financial statements still use the going concern basis when material uncertainty exists?
Yes, when management concludes that the basis remains appropriate. The material uncertainty must then be disclosed clearly, together with the events or conditions giving rise to it.
Related accounting lessons
- Events after the Reporting Period
- Current Ratio: Formula and Interpretation
- Cash Flow Ratio
- Accounting Policies and Estimates
Official sources
- IFRS Foundation: Going Concern—A Focus on Disclosure
- IFRS Foundation 2025 update on going concern educational material
This article is educational and does not replace the complete Standards, local legal requirements or professional advice.
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