Going concern disclosures in client statements
When annual financial statements need a going concern disclosure, which warning signs to look for, and how to gather and record the basis for it.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Every set of financial statements rests on an assumption that usually goes unspoken: that the business will carry on. For most clients that is plainly true. For a few each year it is not obvious at all, and the statements have to say so.
Small owner-managed companies are where this goes wrong most often, because the warning signs are familiar enough to be ignored. Liabilities exceed assets, but "the director will support it". The overdraft is at its limit, but "it always is". This article covers what going concern means in that setting, the signs to look for, what to ask the client for, and how to word the disclosure without promising more than anyone knows.
What going concern means for a small owner-managed company
Statements are prepared on a going concern basis unless management intends to liquidate the entity or stop trading, or has no realistic alternative but to do so. In making that assessment, management considers all available information about the future, covering at least twelve months from the reporting date under IFRS for SMEs and full IFRS alike.
Two outcomes call for disclosure:
- A material uncertainty. The going concern basis is appropriate, but events or conditions may cast significant doubt on the entity's ability to continue. Those uncertainties must be disclosed.
- Not a going concern. The basis is not appropriate. The statements must disclose that fact, the basis on which they were prepared and the reason the entity is not regarded as a going concern.
In an owner-managed company, "management" is usually the owner, which makes the assessment personal. The preparer's job is to make sure it rests on evidence rather than optimism. The ACCA's technical article on going concern sets out the respective responsibilities of management and auditors and the indicators that an entity may not be a going concern.
Warning signs in the trial balance and after year end
Some signs are in the figures:
- liabilities exceeding assets, or current liabilities exceeding current assets;
- losses for the year, especially repeated ones;
- an overdraft at or over its limit, or loan repayments in arrears;
- tax, payroll deductions or suppliers overdue;
- heavy reliance on loans from directors with no agreed terms.
Others appear only after year end, or in conversation:
- loss of a major customer, contract or supplier;
- a lender declining to renew a facility;
- legal claims the company cannot afford;
- a director's plans to wind the business down or sell it.
In South Africa, a company in serious financial difficulty also brings the directors' business rescue duties under the Companies Act into play, another reason to have this conversation early rather than at sign-off.
What to ask the client for: forecasts, funding and support letters
The directors' assessment should be supported. Ask for:
- a cash flow forecast covering at least the assessment period, with its assumptions written down;
- evidence of funding: facility letters, renewal confirmations or agreements for new finance;
- where shareholders or a parent will provide support, a written letter of support setting out its terms, and evidence that the supporter is able to provide it;
- where director loans are relied on, a subordination agreement or written confirmation that the loans will not be called while the company needs them;
- the client's own view of the risks and what it plans to do about them.
In Achekam, staff can send these as a request from the RFI console. The client opens the request from an e-mailed link, uploads files and answers questions, and whatever they send is filed in that client's vault folder. The forecast and the support letter then sit beside the engagement, ready for review.
Recording the judgement and consulting when unsure
Write down the conclusion and how it was reached. For a straightforward case a short memo is enough: the indicators considered, the evidence obtained, the directors' conclusion and the preparer's view on whether disclosure is needed.
Hard cases deserve more. Achekam lets staff take a technical consultation on an engagement from question to conclusion and closure, and record a difference of opinion with each party's position, escalation and resolution. A going concern question the team cannot settle among themselves is exactly what that record is for.
Wording the policy and note without overstating certainty
Wording is where well-meant optimism causes the most trouble. Practical guidance:
- Describe, do not promise. "The directors have considered the company's forecasts and funding and believe it has adequate resources" states their judgement. "The company will continue to trade" is a prediction nobody can make.
- Name the uncertainty. If there is a material uncertainty, say what it is, such as dependence on a facility due for renewal, and that it may cast significant doubt.
- Match the directors' report. Its going concern paragraph must say the same thing as the note.
- Avoid boilerplate where the facts are specific. A generic paragraph in a set with a deficit and an overdue tax liability tells readers that nobody looked.
Achekam's Studio includes standard policy wording based on IFRS for SMEs, labelled for review before issue. Where AI is set up, narrative text carries the label "AI draft - review before issue", and the automated review of a draft lists findings as advice without blocking signing. None of that replaces the judgement. Facts the trial balance does not hold are left as "[to be completed]", and the support for going concern is one of them.
Where the statements are audited, the auditor's own evaluation is a separate exercise, described in the auditor's going concern evaluation. Policy and note wording more generally is covered in accounting policies and notes.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
