Going concern has re-emerged as a live audit and reporting issue. After years of near-zero interest rates during which most entities could refinance comfortably, the sustained shift to higher rates has changed the risk calculus for a significant portion of the corporate population. Auditors are asking harder questions, and the bar for what constitutes a robust going concern assessment has risen accordingly.
What the Standards Require
Under IAS 1, management is required to assess the entity's ability to continue as a going concern when preparing financial statements. If material uncertainties exist that may cast significant doubt on the entity's ability to continue, those uncertainties must be disclosed. If management concludes the entity is not a going concern, the financial statements must be prepared on a different basis.
ISA 570 (Revised) provides the auditing standard. It requires auditors to obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern basis of accounting and to conclude whether a material uncertainty exists. Auditor responsibilities were strengthened in the 2019 revision — auditors are now required to perform risk assessment procedures specifically focused on going concern regardless of whether indicators are present.
The High-Rate Risk Factors Auditors Are Focusing On
The following risk factors have moved to the front of audit attention in the current environment:
- Refinancing risk — debt facilities maturing within the assessment period (typically 12 months from the approval of financial statements) that need to be refinanced at materially higher rates. Management must demonstrate either that refinancing is committed or that cashflows remain sufficient at the higher rate.
- Covenant headroom — interest cover and leverage covenants that were comfortably met at lower rates may now be under pressure. A detailed covenant compliance forecast across the assessment period is essential.
- Floating rate exposure — entities with significant unhedged floating rate debt have seen finance costs increase substantially. The going concern model must reflect the actual current cost of debt, not historic rates.
- Liquidity under stress — the assessment should include reverse stress testing: identifying the scenarios under which the entity would run out of liquidity and assessing the probability of those scenarios.
"A going concern assessment that simply says cashflows are positive is no longer sufficient. Auditors expect scenario modelling, covenant analysis, and evidence of management's mitigating actions."
Building an Assessment That Withstands Scrutiny
A robust going concern assessment in the current environment should include:
- A detailed cash flow forecast for at least 12 months from the date of approval of the financial statements, prepared on a month-by-month basis during periods of tighter liquidity
- Covenant compliance projections for all financial covenants across the same period, with headroom analysis and identification of the earliest date a covenant could be breached under a downside scenario
- Sensitivity analysis — showing the impact of specific adverse scenarios (revenue decline, cost increase, working capital deterioration) on liquidity and covenant compliance
- Reverse stress testing — the scenario or combination of scenarios that would cause the entity to fail, and management's assessment of its likelihood
- Mitigating actions — documented evidence of actions within management's control that could be taken to address liquidity shortfalls, with realistic timelines and committed vs. uncommitted status
The Material Uncertainty Disclosure
Where a material uncertainty exists, IAS 1 requires disclosure that draws attention to the uncertainty and indicates that the entity may be unable to continue as a going concern. The disclosure must be prominent — it cannot be buried in the accounting policies note. It should describe the nature of the uncertainty, the period covered by the assessment, and the key assumptions underlying management's conclusion.
Entities that receive a material uncertainty disclosure for the first time should engage proactively with lenders, investors, and other stakeholders before the financial statements are published. The disclosure itself is not a default event, but the reactions of counterparties to it can be. Managing that communication is as important as getting the accounting right.
When to Engage Advisers
Management should seek specialist input when: debt is maturing within 18 months without committed refinancing; covenant headroom is less than 20% under base case projections; the entity is reliant on a single lender or facility; or the business is in a sector facing structural demand challenges. Early engagement — before auditors raise the issue — gives management more control over the narrative and the options available.