The going concern footnote is one of the most scrutinized notes in a private company's financial statements. Lenders read it for covenant risk, owners read it for funding risk, and the auditor reads it to decide whether the report needs an emphasis paragraph or a modified opinion. Weak notes are common, usually because they repeat boilerplate and omit the three things the standard asks for.
This guide gives illustrative wording for each outcome under ASC 205-40, explains the required elements and where they go, and shows what a poor note looks like. The audit side of the assessment is in the going concern assessment guide; this page is about the note.
What does ASC 205-40 require management to do?
Management evaluates, at each annual and interim reporting period, whether conditions or events, considered in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued, or available to be issued for entities that are not SEC filers. Substantial doubt is raised when it is probable the entity will be unable to meet its obligations as they become due in that period. "Probable" means likely to occur.
If substantial doubt is raised, management considers whether its plans alleviate it. Plans count only if it is probable that they will be effectively implemented within the period and probable that they will mitigate the conditions when implemented. That produces three outcomes, each with its own disclosure requirement:
| Outcome | Disclosure |
|---|---|
| Substantial doubt not raised | None required under ASC 205-40 |
| Raised and alleviated by management's plans | Disclose the principal conditions or events that raised substantial doubt, management's evaluation of their significance in relation to the ability to meet obligations, and management's plans that alleviated it |
| Raised and not alleviated (substantial doubt exists) | State that there is substantial doubt about the entity's ability to continue as a going concern within one year after the issuance date, and disclose the same three elements: conditions or events, management's evaluation of significance, and management's plans intended to mitigate them |
ASC 205-40-50-12 and 50-13 set these disclosures. The standard does not require a stand-alone note or the phrase "substantial doubt" when substantial doubt is alleviated, and it permits the information to appear elsewhere in the notes. Where the conditions and plans are pervasive, a separate note usually serves readers better, and when substantial doubt exists the disclosures should be in one prominent location.
Example 1: substantial doubt not raised (no note)
A manufacturer has a net loss for the year but a committed $2,000,000 revolving line that does not mature for 18 months, and a cash forecast that shows covenant headroom through the look-forward period. Management concludes it is not probable the company will be unable to meet its obligations. No going concern disclosure is required.
Many entities still say in the summary of significant accounting policies that the statements are prepared on a going concern basis. That is acceptable, and it is not a disclosure of substantial doubt.
Example 2: substantial doubt alleviated by management's plans
Illustrative wording for a private company whose term loan matures within twelve months:
Note 2. Liquidity. The Company's $4,500,000 term loan matures on September 30, 2027, which is within one year after the date these financial statements were available to be issued. The Company reported cash of $310,000 at December 31, 2026 and does not expect to generate cash sufficient to repay the loan at maturity from operations. These conditions raised substantial doubt about the Company's ability to continue as a going concern.
Management's evaluation is that, without refinancing, the Company would be unable to meet the repayment obligation as it becomes due. Management has a signed commitment letter from its lender, dated February 14, 2027, to refinance the loan for a five-year term on the terms described in Note 7. The refinancing is subject to customary closing conditions, all of which management expects to satisfy before the maturity date. Management has concluded that it is probable the refinancing will be completed and will resolve the maturity. As a result, substantial doubt has been alleviated.
The note covers the three required elements: the conditions (the maturity and the cash position), management's evaluation (unable to repay without refinancing) and the plan that alleviates the doubt (the commitment). It also states the basis for the conclusion that the plan is probable of being implemented and of mitigating. A plan that depends on a lender who has not yet committed will not meet that bar.
Example 3: substantial doubt exists
Illustrative wording for a company that has not secured funding:
Note 2. Going concern. These financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss of $1,420,000 and used $960,000 of cash in operating activities during 2026, and had a working capital deficit of $2,150,000 and cash of $85,000 at December 31, 2026. The Company's line of credit, with a balance of $1,800,000, expires on June 30, 2027 and the lender has not agreed to extend it. These conditions raise substantial doubt about the Company's ability to continue as a going concern within one year after the date these financial statements are issued.
Management's evaluation is that the Company does not have the liquidity to repay the line of credit at expiry or fund operations through the end of the look-forward period without new financing. Management plans to seek an extension of the line of credit, raise capital from existing owners, and reduce discretionary spending by approximately $400,000 on an annualized basis. These plans have not been approved or committed and are therefore not considered probable of being effectively implemented. The financial statements do not include any adjustments that might result if the Company were unable to continue as a going concern.
It includes the explicit statement of substantial doubt that the standard requires, the conditions, management's evaluation and its plans. The amounts are illustrative.
What a weak note looks like
The Company has experienced losses and there is no assurance it will continue as a going concern. Management is working to improve profitability.
This fails on every element. It does not say whether substantial doubt exists. It names no conditions or amounts. It gives no evaluation of significance and describes the plans only as an intention. A reviewer would call this inadequate disclosure.
Typical problems with going concern notes:
- the word "substantial doubt" is missing in a note where it exists, or used when it was alleviated and no longer exists
- plans that are not described specifically enough for a reader to assess
- conditions listed with no quantification
- the look-forward period stated as ending at year end instead of one year after issuance
- inconsistency with the debt note, covenant disclosures or subsequent events note
Use the going concern disclosure checklist and the going concern evaluation memo to document the conclusion, and the going concern checklist tool for indicators.
How the note affects the auditor's report
AU-C 570 links the report to the adequacy of the disclosure:
- Substantial doubt exists and disclosure is adequate. The auditor's report is unmodified and includes an emphasis-of-matter paragraph drawing attention to the note.
- Substantial doubt was alleviated. The auditor evaluates whether the disclosure is adequate. An emphasis paragraph may be included, and it is not required.
- Substantial doubt exists and disclosure is inadequate. The auditor expresses a qualified or an adverse opinion, depending on the effect.
The emphasis-of-matter template shows the wording, and types of audit opinions covers the opinions.
Worked example (illustrative): the liquidity arithmetic behind the note
Management's cash forecast for the look-forward period shows:
| Amount | |
|---|---|
| Cash at year end | $310,000 |
| Forecast net cash from operations, 12 months | $520,000 |
| Scheduled debt service, excluding the maturity | $(380,000) |
| Capital expenditures | $(150,000) |
| Cash available before the maturity | $300,000 |
| Term loan balloon due September 30 | $(4,500,000) |
| Shortfall without refinancing | $(4,200,000) |
The shortfall, 300,000 − 4,500,000 = $(4,200,000), is the figure the note describes as the condition, and the refinancing commitment is the plan. Without the commitment the note would be written as Example 3.
Frequently asked questions
Does every set of financial statements need a going concern note?
No. ASC 205-40 requires disclosure only when substantial doubt is raised, whether or not it is later alleviated. If substantial doubt is not raised, no disclosure is required.
Where should the going concern disclosure appear?
When substantial doubt exists, the disclosures should be in one prominent location, and a separate note is usually the clearest. When it is alleviated, the information can appear in another note, such as the debt note, if it covers the required elements.
Can management's plans be considered if they are not signed?
A plan counts only if it is probable it will be effectively implemented and probable it will mitigate the conditions. Unsigned or uncommitted plans generally do not meet that standard, as in Example 3.
What if the company is a not-for-profit or governmental entity?
ASC 205-40 applies to not-for-profits that follow FASB standards. Governmental entities follow GASB requirements instead.
Sources
- FASB, ASC 205-40, Presentation of Financial Statements, Going Concern (including 50-12 and 50-13), as explained in the KPMG Handbook, Going concern (2025)
- AICPA, AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern
- FASB, ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error