Will Our Financing Plans Alleviate Substantial Doubt? The 'Probable' Test Explained

Every going-concern conversation I have ever had with a management team reaches the same moment: the cash model shows the gap, and someone says "but we're raising in Q2." Whether that sentence keeps substantial doubt out of your filing depends on a two-part test in ASC 205-40-50-6 that most first-timers have never read closely, and that auditors apply with hard-earned skepticism. Here is how the test actually works, plan type by plan type. The free Cash Runway & Going Concern tool scores each of your mitigation plans against these prongs as part of the runway assessment.

What is the double-probable test in ASC 205-40-50-6?

A management plan's mitigating effect counts only to the extent that both of the following hold:

1. It is probable the plan will be effectively implemented within one year after the financial statements are issued; and
2. It is probable the plan, when implemented, will mitigate the relevant conditions or events.

"Probable" carries its ASC 450 meaning, likely to occur. Both prongs must clear it. A financing that is likely to close but too small to bridge the gap fails prong two; a financing that would fully solve the problem but depends on an unsigned counterparty fails prong one. And under ASC 205-40-50-7, implementation probability is grounded in feasibility, which the assessment translates into two practical screens: is the action within the company's control, and has the board actually authorized it before issuance? A plan management merely intends, or a board has merely discussed, is not a plan for 205-40 purposes.

Which financing plans generally qualify?

The ones that are executed or contractually committed before the financial statements are issued:

• A closed raise. Money in the bank is no longer a plan, it is a condition, and it counts at Step 1.
• A committed, executed credit facility with available capacity you can actually draw, meaning you also model covenant compliance at each draw date across the horizon. Committed capacity behind a covenant you will probably breach is not available capacity.
• An executed amendment or waiver curing the covenant or maturity that raised the doubt.
• Binding purchase or licensing agreements with contractual payment obligations from creditworthy counterparties.

Notice the pattern: qualifying plans are documents with signatures, not strategies with momentum. This is why financing timing against the filing calendar is a board-level issue, the identical raise closed five days before issuance versus five days after produces two different 10-Ks.

Which plans usually fail the test?

• ATM programs. The shelf gives you capacity, not proceeds. Price, volume, and market access are outside your control, and correlated against you, since the scenarios in which you need the ATM most are the scenarios in which your stock is weakest. Auditors almost never accept undrawn ATM capacity as probable mitigation by itself.
• Term sheets, LOIs, and "advanced discussions." Non-binding is non-probable. I have seen exactly one exception survive review, and it involved a signed commitment letter with completed diligence and a fixed close date inside the quarter.
• Asset sales without a signed agreement. A bank process and a data room full of tire-kickers is prong-one failure; add valuation uncertainty and it usually fails prong two as well.
• Unapproved cost reductions. "We could cut burn 30%" counts for nothing until it is a board-approved, quantified plan with an execution timeline inside the horizon.
• Projected revenue inflections. A hockey stick is a forecast, not a plan. Only contractually grounded revenue moves the assessment.

Do cost cuts count? Partially, here's the line.

Expense reductions are the plan type most within management's control, which is why they clear prong one more easily than financings. The discipline is in prong two and in quantification: the assessment can credit approved, specified, executable reductions, a board-authorized reduction in force with a date, terminated programs, exited leases, net of their one-time costs (severance, contract termination fees) and their revenue consequences. A biotech that "pauses" its lead trial to extend runway has also impaired the asset that supports its next raise; honest assessments model both sides. Rough sizing that survives scrutiny beats precise sizing that doesn't.

If our plans do alleviate the doubt, are we done?

No, and this is the omission I see most from first-time teams. ASC 205-40-50-12 requires disclosure even when plans successfully alleviate substantial doubt: the principal conditions that raised it, management's evaluation of their significance, and the plans that resolved it. Alleviation changes the conclusion, not the obligation to show your work. Skipping 50-12 disclosure because "we solved it" is a comment-letter magnet and, if conditions deteriorate next quarter, hands plaintiffs a before-and-after.

If the plans do not alleviate the doubt, ASC 205-40-50-13 requires the full disclosure package including the explicit statement of substantial doubt. Either way, the memo supporting your conclusion, plan by plan, prong by prong, with authorization evidence, is what your auditor will test under AS 2415.07. Build the memo before the audit request arrives; the free Cash Runway & Going Concern tool gives you the skeleton.

FAQ

What does "probable" mean for management's plans under ASC 205-40?

Likely to occur, the same threshold as ASC 450 loss contingencies. Both implementation of the plan and its mitigating effect must independently be probable under ASC 205-40-50-6.

Does an ATM facility alleviate substantial doubt?

By itself, almost never. Undrawn ATM capacity depends on market conditions outside the company's control, so it fails the probable-implementation prong. Proceeds already raised before issuance do count.

Do management's plans need board approval to count?

As a practical matter, yes. Under ASC 205-40-50-7's feasibility framing, a plan generally cannot be probable of effective implementation if the body with authority to execute it has not approved it before the financial statements are issued.

Is disclosure required if substantial doubt is alleviated?

Yes. ASC 205-40-50-12 requires disclosure of the conditions that raised the doubt, their significance, and the alleviating plans, even when the final conclusion is that no substantial doubt remains.