How to Assess Going Concern Under ASC 205-40 (Before Your Auditor Does It for You)

As of July 2026 · Written by Rohit Goel, US CPA · From the filing seat of a US-listed public company

The going-concern assessment is the one place in US GAAP where management is required to forecast, in writing, whether the company survives the next year, and where getting the mechanics wrong produces either a disclosure you didn't need or a restatement-grade omission of one you did. I have run this assessment from the filing seat through financings, covenant breaches, and one near-miss Chapter 11, and the errors are always the same: wrong horizon, wrong threshold, or credit taken for plans that don't qualify. This tutorial walks the actual sequence the standard requires. To pressure-test your own numbers against it, the free Cash Runway & Going Concern tool maps your cash runway directly onto the ASC 205-40 framework.

Who performs the assessment, and how often?

Management, not the auditor, and every reporting period, interim and annual. ASC 205-40-50-1 requires an evaluation "in connection with preparing financial statements for each annual and interim reporting period." That cadence is the first practical trap: a company that scraped past substantial doubt at year-end re-runs the full assessment at Q1, from the new issuance date, with three fewer months of runway unless something improved. Going concern is not an annual exercise with quarterly touch-ups; it is a quarterly exercise.

What is the assessment horizon, and why does "one year from issuance" matter so much?

The horizon is one year from the date the financial statements are issued (or available to be issued), per ASC 205-40-50-4. Not one year from the balance sheet date.

The difference is not academic. A calendar-year company filing its 10-K on March 1 is asserting survivability through the following March 1, roughly fourteen months of runway measured from the balance sheet date. A company with thirteen months of cash at December 31 can therefore fail the test in its December 31 financial statements. Every runway model built for this purpose has to anchor on the expected filing date, and a delayed filing quietly extends the horizon and burns margin while nobody is watching. This is precisely the computation the free Cash Runway & Going Concern tool automates: runway measured to the right date, not the intuitive one.

One more asymmetry to manage: the PCAOB's auditor standard, AS 2415.02, defines the auditor's "reasonable period" as not to exceed one year beyond the date of the financial statements being audited, the balance-sheet date, not issuance. PCAOB Staff Audit Practice Alert No. 13 (September 2014) told auditors to keep applying AS 2415's framework even after FASB adopted ASC 205-40. In practice your auditor will evaluate your 205-40 conclusion over the 205-40 horizon, but the two standards' text does not match, and you should not be surprised when the engagement team frames the period differently than your memo does.

What counts as "substantial doubt"?

Substantial doubt exists when it is probable, the FASB Master Glossary's "likely to occur" threshold, the same word that drives loss contingencies under ASC 450, that the entity will be unable to meet its obligations as they become due within one year after the issuance date.

Two calibration points. First, "probable" is a high bar: substantial doubt is not triggered by risk, thin coverage, or a qualitative sense of trouble, it requires that failure to meet obligations is likely. Second, the test is obligations-based, not cash-balance-based. A company can hold cash and still fail the test because a debt maturity, a covenant-triggered acceleration, or a contractual milestone payment inside the window is unpayable. Model obligations, not just burn.

How does the two-step assessment actually run?

Step 1: Evaluate conditions and events, ignoring management's plans that are not fully implemented. ASC 205-40-50-4 and 50-5 require you to first ask whether substantial doubt is raised based on what exists today: recurring losses, negative operating cash flow, working capital deficits, maturities inside the window, covenant positions, loss of a key customer or license. Financings you intend to do are invisible at this step. Actions already completed, a facility drawn, an amendment executed, count, because they are conditions, not plans.

Step 2: If doubt is raised, test whether management's plans alleviate it. Here ASC 205-40-50-6 imposes a double-probable standard. A plan's mitigating effect counts only to the extent that:

• it is probable the plan will be effectively implemented within the year, and
• it is probable the plan, when implemented, will mitigate the conditions that raised the doubt.

ASC 205-40-50-7 grounds the first prong in feasibility, and in practice, in control and authorization. A plan generally cannot be probable of implementation if it depends on parties you do not control or if the board has not approved it before issuance. This is where undisciplined assessments die:

• An ATM facility is not a plan you control. Capacity to sell shares is not probability of proceeds at a price that funds the gap, especially for a small-cap whose stock is falling for the same reasons the assessment is happening.
• A term sheet or LOI is not a committed financing. Uncommitted, contingent, or diligence-conditioned money rarely clears "probable."
• Cost reductions can qualify, headcount and discretionary spend are within management's control, but only the portion that is approved, quantified, and executable within the horizon.
• A signed, committed credit facility or a closed raise does qualify, which is why the sequencing of a financing against a filing date is often the whole ballgame.

What disclosure does each outcome require?

Three outcomes, three treatments:

1. No substantial doubt raised: no 205-40 disclosure, though MD&A liquidity disclosure under Item 303 of Regulation S-K still applies and frequently tells the early chapters of the same story.
2. Doubt raised, alleviated by plans: ASC 205-40-50-12 requires disclosure of the principal conditions that raised the doubt, management's evaluation of their significance, and the plans that alleviated it. This is the disclosure companies most often skip, "we fixed it" does not mean "we omit it."
3. Doubt not alleviated: ASC 205-40-50-13 requires the same conditions-and-plans disclosure plus an explicit statement that there is substantial doubt about the entity's ability to continue as a going concern within one year after the issuance date. The magic words are mandatory; hedged paraphrases ("may be unable to continue...") are a recurring SEC comment-letter theme.

How does the auditor's work interact with yours?

Under AS 2415, the auditor independently evaluates whether substantial doubt exists (AS 2415.02), obtains and assesses management's plans (AS 2415.07), evaluates disclosure adequacy (AS 2415.10), and, if doubt remains, adds an explanatory paragraph to the opinion containing the phrase "substantial doubt about its ability to continue as a going concern" (AS 2415.12). Three field notes: the explanatory paragraph is not a qualified opinion, though the market often prices it like one; the auditor's conclusion cannot lean on plans management hasn't documented and the board hasn't approved, so your Step 2 file is the whole conversation; and expect the going-concern paragraph to surface in debt-covenant reps, exchange listing reviews, and D&O renewal questionnaires within the quarter.

What does a defensible assessment file contain?

A dated memo anchored to the expected issuance date; a monthly (not quarterly) cash and obligations forecast covering the full horizon; covenant compliance projections; the Step 1 conclusion before plans; each plan scored against both probable prongs with board authorization evidence; and the disclosure conclusion mapped to 50-12 or 50-13. Build it every quarter, whether or not doubt exists, the quarter you need it is the quarter you won't have time to build it.

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