ASC

ASC 205-40

Going Concern

205 Presentation of Financial Statements

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In brief

IntroductoryDisclosurePresentationFinancial statement presentation

ASC 205-40 requires management of every entity, in connection with preparing annual and interim financial statements, to evaluate whether conditions and events considered in the aggregate raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued (or are available to be issued). Substantial doubt exists when it is probable the entity will be unable to meet its obligations as they become due in that lookforward period, assessed initially without regard to unimplemented management plans. Depending on whether management's plans alleviate that doubt, prescribed note disclosures — including an express "substantial doubt" statement when doubt is not alleviated — are required.

Key points (7)
  • The going concern basis of accounting is presumed unless and until liquidation becomes imminent, at which point the liquidation basis under Subtopic 205-30 applies (205-40-05-1).
  • Management must perform the going concern evaluation each annual and interim reporting period, using a one-year-after-issuance lookforward period and conditions known and reasonably knowable at the issuance date (205-40-50-1; 205-40-50-3).
  • Substantial doubt exists when relevant conditions and events, in the aggregate, indicate it is probable the entity will be unable to meet its obligations as they become due within one year after issuance; the initial evaluation excludes the mitigating effect of plans not fully implemented (205-40-50-4).
  • Management's plans may be considered in alleviating substantial doubt only if it is probable both that the plans will be effectively implemented and that, when implemented, they will mitigate the relevant conditions or events (205-40-50-7); approval of the plan before the issuance date is generally required (205-40-50-8).
  • A plan to meet obligations through liquidation cannot be considered in evaluating whether substantial doubt is alleviated, even if liquidation is probable (205-40-50-11).
  • If plans alleviate substantial doubt, disclose the principal conditions or events, management's evaluation of their significance, and the plans that alleviated the doubt (205-40-50-12); if doubt is not alleviated, additionally include an explicit statement that substantial doubt exists (205-40-50-13).
  • Disclosures continue and become more extensive in subsequent periods, with context and continuity, and in the period substantial doubt no longer exists the entity discloses how the conditions or events were resolved (205-40-50-14).

For students. Exam favorite: the assessment window runs one year from the date the financial statements are ISSUED (not the balance sheet date), and the threshold is "probable," not "reasonably possible." The most common mistake is netting management's unimplemented rescue plans into the initial assessment — plans are considered only in the second step, and only if both implementation and mitigation are probable.

going concern basis of accountingsubstantial doubtone year after issuance dateprobablemanagement's plansknown and reasonably knowableliquidation basis of accountingnote disclosure

Machine-generated study aid for ASC 205-40. Check the source paragraphs below.

205-40-00Status

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205-40-05Overview and Background

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205-40-05-1
Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting in accordance with Subtopic 205-30 on the liquidation basis of accounting.
205-40-05-2
Even if an entity's liquidation is not imminent, there may be conditions and events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements continue to be prepared under the going concern basis of accounting, but the guidance in this Subtopic should be followed to determine whether to disclose information about the relevant conditions or events.
205-40-05-3
This Subtopic provides guidance for evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and about related note disclosures.

205-40-15Scope and Scope Exceptions

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Entities

205-40-15-1
The guidance in this Subtopic applies to all entities.

205-40-50Disclosure

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Evaluating Conditions and Events That May Raise Substantial Doubt

205-40-50-1
In connection with preparing financial statements for each annual and interim reporting period, an entity's management shall evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).
205-40-50-2
Ordinarily, conditions or events that raise substantial doubt about an entity's ability to continue as a going concern relate to the entity's ability to meet its obligations as they become due. Accordingly, management's evaluation of an entity's ability to continue as a going concern ordinarily is based on conditions and events that are relevant to an entity's ability to meet its obligations as they become due within one year after the date that the financial statements are issued.
205-40-50-3
Management's evaluation shall be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued.
205-40-50-4
Management shall evaluate whether relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The evaluation initially shall not take into consideration the potential mitigating effect of management's plans that have not been fully implemented as of the date that the financial statements are issued (for example, plans to raise capital, borrow money, restructure debt, or dispose of an asset that have been approved but that have not been fully implemented as of the date that the financial statements are issued).
205-40-50-5
When evaluating an entity's ability to meet its obligations, management shall consider quantitative and qualitative information about the following conditions and events, among other relevant conditions and events known and reasonably knowable at the date that the financial statements are issued:
  1. a
    The entity's current financial condition, including its liquidity sources at the date that the financial statements are issued (for example, available liquid funds and available access to credit)
  2. b
    The entity's conditional and unconditional obligations due or anticipated within one year after the date that the financial statements are issued (regardless of whether those obligations are recognized in the entity's financial statements)
  3. c
    The funds necessary to maintain the entity's operations considering its current financial condition, obligations, and other expected cash flows within one year after the date that the financial statements are issued
  4. d
    The other conditions and events, when considered in conjunction with (a), (b), and (c) above, that may adversely affect the entity's ability to meet its obligations within one year after the date that the financial statements are issued. See paragraph 205-40-55-2 for examples of those conditions and events.

Consideration of Management's Plans When Substantial Doubt Is Raised

205-40-50-6
When relevant conditions or events, considered in the aggregate, initially indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (and therefore they raise substantial doubt about the entity's ability to continue as a going concern), management shall evaluate whether its plans that are intended to mitigate those conditions and events, when implemented, will alleviate substantial doubt about the entity's ability to continue as a going concern.
205-40-50-7
The mitigating effect of management's plans shall be considered in evaluating whether the substantial doubt is alleviated only to the extent that information available as of the date that the financial statements are issued indicates both of the following:
  1. a
    It is probable that management's plans will be effectively implemented within one year after the date that the financial statements are issued.
  2. b
    It is probable that management's plans, when implemented, will mitigate the relevant conditions or events that raise 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.
205-40-50-8
The evaluation of whether it is probable that management's plans will be effectively implemented within one year after the date that the financial statements are issued shall be based on the feasibility of implementation of management's plans in light of an entity's specific facts and circumstances. Generally, to be considered probable of being effectively implemented, management (or others with the appropriate authority) must have approved the plan before the date that the financial statements are issued. Paragraph 205-40-55-3 provides examples of plans that management may implement and information that management should consider for each plan in evaluating the feasibility of the plans.
205-40-50-9
The mitigating effect of management's plans that are not probable of being effectively implemented within one year after the date that the financial statements are issued shall not be considered in evaluating whether substantial doubt about an entity's ability to continue as a going concern is alleviated.
205-40-50-10
As required in paragraph 205-40-50-7, management shall further assess its plans that are probable of being effectively implemented to determine whether it is probable that those plans will mitigate the conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. In this assessment, management shall consider the expected magnitude and timing of the mitigating effect of its plans in relation to the magnitude and timing of the relevant conditions or events that those plans intend to mitigate.
205-40-50-11
A plan to meet an entity's obligations as they become due through liquidation (as defined in Subtopic 205-30 on the liquidation basis of accounting) shall not be considered as part of management's plans in evaluating whether substantial doubt is alleviated even if liquidation is probable of occurring.

Disclosures When Substantial Doubt Is Raised but Is Alleviated by Management's Plans (Substantial Doubt Does Not Exist)

205-40-50-12
If, after considering management's plans, substantial doubt about an entity's ability to continue as a going concern is alleviated as a result of consideration of management's plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):
  1. a
    Principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern (before consideration of management's plans)
  2. b
    Management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations
  3. c
    Management's plans that alleviated substantial doubt about the entity's ability to continue as a going concern.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If, after considering management's plans, substantial doubt about an entity's ability to continue as a going concern is alleviated as a result of consideration of management's plans, an entity shall disclose in the notes to interim and annual financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):
  1. a
    Principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern (before consideration of management's plans)
  2. b
    Management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations
  3. c
    Management's plans that alleviated substantial doubt about the entity's ability to continue as a going concern.

Disclosures When Substantial Doubt Is Raised and Is Not Alleviated (Substantial Doubt Exists)

205-40-50-13
If, after considering management's plans, substantial doubt about an entity's ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is 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. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:
  1. a
    Principal conditions or events that raise substantial doubt about the entity's ability to continue as a going concern
  2. b
    Management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations
  3. c
    Management's plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If, after considering management's plans, substantial doubt about an entity's ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to interim and annual financial statements indicating that there is 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. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following in interim and annual reporting periods:
  1. a
    Principal conditions or events that raise substantial doubt about the entity's ability to continue as a going concern
  2. b
    Management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations
  3. c
    Management's plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.
205-40-50-14
If conditions or events continue to raise substantial doubt about an entity's ability to continue as a going concern in subsequent annual or interim reporting periods, the entity shall continue to provide the required disclosures in paragraphs
205-40-50-12 through 50-13
in those subsequent periods. Disclosures should become more extensive as additional information becomes available about the relevant conditions or events and about management's plans. An entity shall provide appropriate context and continuity in explaining how conditions or events have changed between reporting periods. For the period in which substantial doubt no longer exists (before or after consideration of management's plans), an entity shall disclose how the relevant conditions or events that raised substantial doubt were resolved.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If conditions or events continue to raise substantial doubt about an entity's ability to continue as a going concern in subsequent annual or interim reporting periods, the entity shall continue to provide the required disclosures in paragraphs
205-40-50-12 through 50-13
in those subsequent periods. Disclosures should become more extensive as additional information becomes available about the relevant conditions or events and about management's plans. An entity shall provide appropriate context and continuity in explaining how conditions or events have changed between reporting periods. For the period in which substantial doubt no longer exists (before or after consideration of management's plans), an entity shall disclose how the relevant conditions or events that raised substantial doubt were resolved. The disclosures in this paragraph are required in interim and annual reporting periods.

205-40-55Implementation Guidance and Illustrations

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Implementation Guidance

205-40-55-1
The following flowchart depicts the decision process to follow for evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and determining related disclosure requirements.
  • No "Are the criteria met for the liquidation basis of accounting? (Subtopic 205-30)" "Are there conditions or events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued (or available to be issued)? (paragraphs 205-40-50-01 through 50-5)" "An entity shall disclose information to help users understand the following when substantial doubt is alleviated by management's plans: 1. Principal conditions or events that raised substantial doubt, before consideration of management's plans 2. Management's evaluation of the significance of those conditions or events 3. Management's plans that alleviated substantial doubt. (paragraph 205-40-50-12)" Apply the liquidation basis of accounting. (Subtopic 205-30) "No disclosures are required specific to going concern uncertainties under Subtopic 205-40. See Topics 275 and 450 for other disclosures about risks, uncertainties, and contingencies, as applicable." "Is it probable that management's plans will be effectively implemented? (paragraphs 205-40-50-7 through 50-8)" Yes No No Yes Yes Start "An entity shall disclose information to help users understand the following when substantial doubt is not alleviated: 1. Principal conditions or events that raise substantial doubt 2. Management's evaluation of the significance of those conditions or events 3. Management's plans that are intended to mitigate the conditions or events that raise substantial doubt. The entity also should include in the footnotes a statement indicating that there is 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 (or available to be issued). (paragraph 205-40-50-13)" No "Consider management's plans intended to mitigate the adverse conditions or events. (paragraphs 205-40-50-6 through 50-11)" "Is it probable that management's plans will mitigate the relevant conditions or events that raise substantial doubt? (paragraph 205-40-50-10)" Yes
205-40-55-2
The following are examples of adverse conditions and events that may raise substantial doubt about an entity's ability to continue as a going concern. The examples are not all-inclusive. The existence of one or more of these conditions or events does not determine that there is substantial doubt about an entity's ability to continue as a going concern. Similarly, the absence of those conditions or events does not determine that there is no substantial doubt about an entity's ability to continue as a going concern. Determining whether there is substantial doubt depends on an assessment of relevant conditions and events, in the aggregate, that are known and reasonably knowable at the date that the financial statements are issued (or at the date the financial statements are available to be issued when applicable). An entity should weigh the likelihood and magnitude of the potential effects of the relevant conditions and events, and consider their anticipated timing.
  1. a
    Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios
  2. b
    Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets
  3. c
    Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, and a need to significantly revise operations
  4. d
    External matters, for example, legal proceedings, legislation, or similar matters that might jeopardize the entity's ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.
205-40-55-3
The following are examples of plans that management may implement to mitigate conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. The examples are not all-inclusive. Below each example is a list of the types of information that management should consider at the date that the financial statements are issued in evaluating the feasibility of the plans to determine whether it is probable that the plan will be effectively implemented within one year after the date that the financial statements are issued.
  1. a
    Plans to dispose of an asset or business:
    1. 1
      Restrictions on disposal of an asset or business, such as covenants that limit those transactions in loan or similar agreements, or encumbrances against the asset or business
    2. 2
      Marketability of the asset or business that management plans to sell
    3. 3
      Possible direct or indirect effects of disposal of the asset or business
  2. b
    Plans to borrow money or restructure debt:
    1. 1
      Availability and terms of new debt financing, or availability and terms of existing debt refinancing, such as term debt, lines of credit, or arrangements for factoring receivables or sale and leaseback of assets
    2. 2
      Existing or committed arrangements to restructure or subordinate debt or to guarantee loans to the entity
    3. 3
      Possible effects on management's borrowing plans of existing restrictions on additional borrowing or the sufficiency of available collateral
  3. c
    Plans to reduce or delay expenditures:
    1. 1
      Feasibility of plans to reduce overhead or administrative expenditures, to postpone maintenance or research and development projects, or to lease rather than purchase assets
    2. 2
      Possible direct or indirect effects on the entity and its cash flows of reduced or delayed expenditures
  4. d
    Plans to increase ownership equity:
    1. 1
      Feasibility of plans to increase ownership equity, including existing or committed arrangements to raise additional capital
    2. 2
      Existing or committed arrangements to reduce current dividend requirements or to accelerate cash infusions from affiliates or other investors.

205-40-65Transition Date and Open Effective Date Information

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205-40-65-1
Paragraph superseded on 06/20/2018 after the end of the transition period stated in Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.

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