Going Concern Assessment: The 12-Month Test Under ASC 205-40

What Is a Going Concern Assessment?

A going concern assessment is management’s evaluation, required by ASC 205-40 in every annual and interim reporting period, of whether it’s probable the entity won’t be able to meet its obligations as they come due within one year after the financial statements are issued. It’s a GAAP requirement on management, not an audit procedure. A company with no auditor still owes the analysis. At indinero, the conclusion sits on the close calendar rather than the audit calendar, because it’s a financial reporting deliverable like any other significant judgment.

The standard is younger than most of the GAAP around it. Before FASB issued ASU 2014-15 in August 2014, US GAAP contained no going concern guidance at all. The only authority lived in the auditing literature, which left an unaudited private company with no codified obligation and no defined threshold. The guidance took effect for annual periods ending after December 15, 2016, and no later ASU has rewritten the core model.

Under ASC 205-40-20, substantial doubt about going concern exists when relevant conditions and events, considered in the aggregate, indicate it’s probable the entity will be unable to meet its obligations within the look-forward period. Probable carries its ASC 450-20 meaning. Likely to occur. That sits well above “more likely than not,” and a 51 percent mental model sets the bar low enough to produce disclosure the facts don’t support.

The mechanics worth fixing in your head before you start:

• It’s management’s conclusion. The auditor reaches a separate one, under separate standards, after yours exists.
• It applies to every entity. Public and private, for-profit and not-for-profit. No private company alternative, no size exemption, no audit trigger.
• It runs every period. Annual and interim both, per ASC 205-40-50-1.
• The going concern basis is presumed until liquidation is imminent, when the entity moves to the liquidation basis under ASC 205-30.
• The clock starts at issuance, not at the balance sheet date.

That last point is what most often produces a wrong answer from a competent team, and it’s why the conclusion belongs with the rest of your GAAP reporting discipline.

The ASC 205-40 Evaluation Framework

The ASC 205-40 evaluation framework is a sequential two-step model, and Step 1 deliberately ignores the thing management most wants to point at.

ASC 205-40-50-1 requires the evaluation in connection with preparing financial statements for each annual and each interim reporting period. Quarterly counts. Plenty of mid-market finance teams run this once a year alongside the audit and never touch the interim requirement.

ASC 205-40-50-4 is the paragraph that gets skipped. Management evaluates whether conditions and events indicate it’s probable the entity can’t meet its obligations in the look-forward period, without considering the mitigating effect of plans that haven’t been fully implemented at the issuance date. A signed but unfunded term sheet. A planned reduction in force. A bridge round in negotiation. None of it counts in Step 1.

ASC 205-40-50-5 sets the population of information to consider:

• Current financial condition, including liquidity sources and available liquid funds
• Conditional and unconditional obligations due or anticipated within one year after the issuance date, whether or not they’re recognized on the balance sheet
• Funds necessary to maintain operations, given that financial condition, those obligations, and other expected cash flows
• Other conditions and events that may adversely affect the ability to meet obligations

Read the second bullet twice. Recognized or not. Operating commitments, non-cancelable vendor contracts, purchase obligations, and contingent earnouts belong in the population even when they sit off the face of the balance sheet.

ASC 205-40-55-2 supplies the non-exhaustive list of adverse conditions: recurring operating losses, working capital deficiencies, negative operating cash flows, loan defaults, debt restructuring undertaken to avoid default, denial of usual trade credit, and loss of a principal customer or supplier. One indicator doesn’t establish substantial doubt by itself. ASC 205-40-55-1 carries the decision flowchart, and an honest read on liquidity versus solvency usually tells you which of the 55-2 items you’re actually holding.

Only when Step 1 raises substantial doubt does management reach ASC 205-40-50-6 and begin crediting its own plans.

The One-Year Look-Forward Period

The look-forward period runs one year from the date the financial statements are issued or are available to be issued. Not one year from the balance sheet date. That distinction is the single most common error in practice, and it changes the answer.

Work the calendar. A December 31 balance sheet issued on March 31 carries a look-forward period ending the following March 31. That’s 15 months of visibility measured from the balance sheet date, not 12. Issue on April 15 instead and the period stretches further still.

“Issued” and “available to be issued” are the ASC 855 subsequent events definitions. Statements are available to be issued once they comply with GAAP in form and format and all necessary approvals are in hand, which for a venture-backed company usually means management plus the board.

The evidence base is what’s known and reasonably knowable at that date, per ASC 205-40-50-3 through 50-5. Reasonably knowable does the heavy lifting. A renewal cohort that’s visibly churning, a lender who has verbally signaled it won’t extend, a concentrated customer renegotiating mid-term. All of it is in scope even if nobody has put it in a board deck yet, which is why the cash flow forecast behind this conclusion gets rebuilt at issuance instead of reused from the close.

When Management Plans Alleviate Substantial Doubt

ASC 205-40-50-7 sets a twin test, and a plan has to clear both limbs. It has to be probable that the plans will be effectively implemented within one year after the issuance date, and probable that the plans, once implemented, will mitigate the conditions or events that raised the doubt.

Both. Not either.

Limb 1 is a governance question. ASC 205-40-50-8 treats plans as probable of effective implementation only when they’ve been approved before the date the financial statements are issued, by the party with the authority to approve them. Board minutes are the evidence. A plan the CEO intends to bring to the board next quarter doesn’t qualify, and ASC 205-40-50-9 states that the mitigating effect of plans failing this test shall not be considered at all.

Limb 2 is arithmetic. ASC 205-40-50-10 asks whether qualifying plans will actually mitigate, weighing the expected magnitude and timing of the mitigating effect against the magnitude and timing of the conditions the plans address. A cost reduction saving $400k a quarter starting in Q3 does not mitigate a $6m debt maturity in Q2. The plan is credible. It just doesn’t land in time.

Limb 2 is where most going concern memos break.

What the Disclosure Has to Say

The going concern disclosure requirements split into three outcomes, and the drafting differs materially between them.

• Outcome A. No substantial doubt raised in Step 1. No ASC 205-40 disclosure is required. Liquidity discussion may still be warranted under other guidance, but the going concern note isn’t triggered.
• Outcome B. Doubt raised, then alleviated by management’s plans (ASC 205-40-50-12). Disclose the principal conditions or events that raised substantial doubt before consideration of plans, management’s evaluation of their significance, and the plans that alleviated the doubt.
• Outcome C. Doubt raised and not alleviated (ASC 205-40-50-13). Disclose the same first two items, describe the plans intended to mitigate the conditions, and add the required statement that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date the statements are issued.

Here is the contrast almost nobody draws cleanly. That phrase belongs only in Outcome C. Outcome B deliberately omits it. Teams over-draft in one direction, inserting the substantial doubt language into an alleviated note and changing what every lender and investor reads. Then they hedge in the other. “There may be substantial doubt” is not the 50-13 statement, and conditional language in the corresponding audit report section is prohibited outright, so the same discipline should govern the note. The AICPA’s going concern guidance for clients is a useful cross-check while drafting.

ASC 205-40-50-14 governs what happens next. Disclosures continue while the conditions do, become more extensive as information develops, and explain how the conditions were resolved once they are. A note copied forward verbatim from last quarter is a defect, not a control.

SaaS-Specific Application

For a venture-backed SaaS company, the ASC 205-40 analysis turns on three things. The issuance-date runway, the obligation schedule, and the quality of the funding commitment.

Re-anchor the runway number. Board runway is measured from today. ASC 205-40 runway is measured from the issuance date. A company closing December 31 and issuing audited statements on April 15 has to meet obligations through April 15 of the following year. A January board deck claiming 14 months of runway can still leave the 205-40 window reaching past the cash-out date. Reconciling the board model to the obligation schedule is the first working paper in the file, and it’s a different exercise from the burn rate math that produced the deck.

Build the obligation schedule, not just the cash forecast. ASC 205-40-50-5 asks for conditional and unconditional obligations, recognized or not. For SaaS that means debt principal and interest, minimum commitments under cloud and infrastructure contracts, non-cancelable software subscriptions, ASC 842 lease obligations, severance under approved restructuring plans, earnouts from prior acquisitions, and deferred payroll taxes. Multi-year committed spend with a hyperscaler is the line item teams forget. Deferred revenue is a performance obligation rather than a cash obligation, but the cost to deliver against it belongs in the operating cash requirement.

Weigh the funding commitment honestly. Founders routinely believe a letter from the lead investor solves the problem. Under 50-7 and 50-8, a non-binding letter of support usually carries little weight, because it isn’t a commitment by the funder and limb 1 fails on that alone. The auditor testing the same facts needs evidence of both intent and ability to provide the support.

What moves the analysis:

• A signed and funded bridge note, closed before the issuance date
• A binding, irrevocable commitment with a defined amount and draw period
• An executed credit facility with availability no covenant is about to block
• Evidence of the supporting entity’s capacity to fund, not just its willingness

What doesn’t, on its own:

• A term sheet subject to confirmatory diligence
• A letter of comfort or a non-binding side letter
• A pipeline of investor conversations
• An equity line whose capacity depends on a stock price you don’t control

Venture debt covenants cut twice. A minimum-cash or ARR covenant the company isn’t probable of meeting at a measurement date inside the window pulls that debt into the obligation schedule, which can turn comfortable runway into substantial doubt in a single quarter. The same facts also decide classification. Under ASC 470-10-45, a violation giving the lender a call right, or a probable failure to comply at measurement dates in the next twelve months, forces current classification unless a substantive waiver covering more than one year is obtained. A waiver curing only the current breach leaves the problem in place. When a round is in motion while the file is open, the accounting problems that surface during fundraising are the same facts from another angle.

Interim quarters roll the window forward every time statements are issued, which is how a company passes at Q1 and fails at Q2 on essentially unchanged facts. Several rolling twelve-month scenarios instead of one base case is the practical control, and it’s standard work inside indinero’s SaaS accounting engagements.

Common Pitfalls

Most going concern errors are mechanical rather than judgmental. Each one below maps to a specific paragraph, so each one is checkable in an afternoon.

1. Measuring the window from the balance sheet date. It runs from issuance or availability for issuance (ASC 205-40-20, 50-1). Wrong anchor date, wrong answer.
2. Running the assessment annually only. It’s required every annual and interim reporting period (ASC 205-40-50-1).
3. Letting plans into Step 1. The initial evaluation excludes the mitigating effect of plans not fully implemented at the issuance date (ASC 205-40-50-4).
4. Crediting an unapproved plan. Board approval before the issuance date is a precondition to limb 1 (ASC 205-40-50-8).
5. Passing limb 1 and forgetting limb 2. A plan probable of implementation still has to be probable of mitigating, at the right magnitude and timing (ASC 205-40-50-7, 50-10).
6. Treating a non-binding support letter as a commitment. It usually fails both limbs, and it fails the auditor’s intent-and-ability evidence test.
7. Omitting the required phrase in Outcome C. The notes must state there is substantial doubt about the entity’s ability to continue as a going concern (ASC 205-40-50-13).
8. Inserting that phrase when doubt was alleviated. Outcome B describes conditions and plans without asserting substantial doubt (ASC 205-40-50-12).
9. Rolling the prior period note forward unchanged. Disclosures get updated as information develops, and explain how conditions were resolved once they are (ASC 205-40-50-14).
10. Excluding off-balance-sheet obligations. Conditional and unconditional obligations both count, recognized or not (ASC 205-40-50-5). The population discipline governing your accrued expenses applies here too.
11. Assuming no audit means no requirement. ASC 205-40 binds management of every entity reporting under US GAAP.

Most generalist firms catch the pitfalls with a number attached and miss the ones with a date attached. Indinero’s CPA team reviews the going concern conclusion during monthly close, while a plan still has time to reach a board agenda before issuance.

The Audit-Ready Standard

An audit-ready going concern file is four things. A dated memo, the obligation schedule behind it, the scenario models that support the conclusion, and the board approvals that carry each plan through limb 1.

The auditor’s conclusion is separate from management’s and reached under a separate standard. For a private company audit, AU-C section 570 comes from SAS No. 132, effective for periods ending on or after December 15, 2017 and later amended by SAS No. 134. It aligned the auditor’s assessment period with the period required by the applicable financial reporting framework, so under US GAAP the auditor looks at the same one-year-from-issuance window management does.

The reporting mechanics changed, and a great deal of live content still has this wrong. Substantial doubt used to surface as an emphasis-of-matter paragraph. Today, when substantial doubt exists and the disclosures are adequate, the auditor includes a separate section of the report headed “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern,” drawing attention to management’s note and stating that the opinion isn’t modified with respect to the matter. Conditional language there is prohibited. The emphasis-of-matter paragraph is now the discretionary option in the alleviated close call, and it’s frequently the first thing a lender notices.

For an SEC issuer the two windows don’t match. PCAOB AS 2415 requires the auditor to evaluate whether substantial doubt exists for a reasonable period not to exceed one year beyond the date of the financial statements being audited. That’s the balance sheet date. Management’s ASC 205-40 window extends past it by however long the closing and filing cycle runs, so the two conclusions can legitimately differ in the tail of the period. The Center for Audit Quality’s summary of management and auditor responsibilities is the cleanest neutral read on the split. The PCAOB’s going concern standard-setting project remains open, with staff developing a proposal for the Board. There is no adopted amendment to AS 2415.

None of this is rare. Audit Analytics counted 1,816 US public companies receiving a going concern opinion in fiscal year 2022, roughly 24 percent of the filers in its population, against an all-time peak of 2,853 in fiscal 2008. A going concern opinion doesn’t mean a startup is finished. It means the file has to hold up, which is the same documentation discipline that carries the rest of audit preparation.

How Indinero Approaches Going Concern

Indinero’s accounting team is CPA-led, and the going concern conclusion gets reviewed during monthly close rather than at the audit. When a company is carrying under a year of runway, timing is the whole game. A plan approved in February counts for a March issuance. The same plan approved in April doesn’t.

What that looks like in practice:

• The obligation schedule comes out of the ledger, not out of memory in week one of fieldwork. Conditional and unconditional both, including the committed cloud spend and the earnout nobody tracks.
• Scenarios roll with the issuance date. Twelve-month cash models refreshed every quarter the interim requirement fires, reconciled back to the board runway number.
• The memo is contemporaneous. Conditions, evaluation, plans, board approval dates, and the conclusion, dated before issuance rather than reconstructed after it.
• The disclosure is drafted against the right paragraph. 50-12 or 50-13, with the required statement present or absent on purpose.

All of it is handled inside the same engagement as your bookkeeping, tax, and CFO advisory, not as a technical accounting carve-out with its own scope and its own invoice. The team that builds the cash forecast is the team that writes the memo. Continuous operations since 2009, 500+ regular customers, 100+ years combined team experience, SOC 2 compliant in 2026, a 5-star Clutch rating, and pricing that starts at $750/mo with month-to-month engagements available.

Indinero doesn’t perform audits or issue opinions. What we do is make sure the analysis, the schedule, and the note are finished and defensible before your auditor asks for them.

A going concern assessment isn’t a verdict on your company. It’s a reporting conclusion with a defined window, a defined threshold, and defined inputs, and it’s far easier to reach in February than in April. If yours is coming due and nobody owns it, talk to an expert. Start with a free consultation. We’d love to learn about your business and where the pressure actually sits.

Frequently asked questions

Going concern questions tend to arrive fast, usually from a founder or a board member who has just seen the phrase in a draft note. The common ones are about who owns the conclusion, how much weight an investor support letter really carries, what happens when a round closes between the close and the issuance date, and whether an unaudited company has to run the analysis at all. Short answers below, each tied back to the paragraph that governs it.

Does a going concern paragraph mean the auditor expects us to fail?

No, a going concern conclusion means substantial doubt exists under a defined accounting threshold, not that the auditor predicts the company will fail. Post-SAS No. 134 the auditor no longer uses an emphasis-of-matter paragraph for this. Substantial doubt appears in a separate report section headed “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern,” which draws attention to management’s note while leaving the opinion unmodified. Management’s own ASC 205-40 conclusion comes first, and indinero’s CPA team dates that memo before issuance.

How much weight does an investor support letter carry in the analysis?

A non-binding investor support letter usually carries little weight, because a going concern assessment credits only plans that are probable of being effectively implemented. Probable carries its ASC 450-20 meaning, likely to occur, which sits well above more likely than not. A letter that binds nobody generally fails that implementation limb on its own, and the plan also has to be probable of mitigating the conditions. A signed, binding, funded commitment with a defined amount and draw period is a different fact pattern.

Do we still disclose if a round closes before the statements are issued?

Usually yes, because the conditions that existed still drive the going concern disclosure even when a round closes before issuance. The look-forward period runs one year from the date the statements are issued or are available to be issued, not from the balance sheet date. A closed round is a subsequent event that can alleviate substantial doubt, which moves you to the ASC 205-40-50-12 disclosure. That note describes the conditions and the plans, and omits the required substantial doubt statement reserved for 50-13.

Does a company with no audit have to run this assessment at all?

Yes, any entity preparing GAAP financial statements owes the ASC 205-40 going concern assessment, because it’s management’s responsibility rather than an audit procedure. There’s no private company alternative, no size exemption, and no audit trigger. ASC 205-40-50-1 requires the evaluation every annual and every interim reporting period, so quarterly counts too. Indinero’s CPA team reviews the conclusion during monthly close, which leaves a plan time to reach a board agenda before issuance.

Can a going concern disclosure trip a covenant in our venture debt?

A going concern disclosure can trip venture debt covenants, because some credit agreements require audited statements delivered without a going concern qualification. The exposure runs the other way too. A minimum-cash or ARR covenant you aren’t probable of meeting at a measurement date inside the window pulls that debt into the obligation schedule. Under ASC 470-10-45 that same probable failure forces current classification unless a substantive waiver covers more than one year. Indinero builds the obligation schedule and the cash model inside one engagement.