Going Concern Disclosures: Risks and Responsibilities for CFOs

The Most Honest Line in the Financial Statements: Grappling with Going Concern

I remember the moment vividly. It was late December, the kind of night when most people are preoccupied with holiday flights and family rituals. But we were in the office, staring down a reality that felt both deeply familiar and existential. Payroll was funded, but only barely. A bridge round was stuck in legal limbo. One board member refused to sign the subordination agreement. I knew then that our next board update would carry a sentence no founder wants to see and no CFO wants to draft: “There is substantial doubt about the company’s ability to continue as a going concern.” That line — almost surgical in its neutrality — can be more disruptive than a sharp drop in revenue. It asks a company to confront its own mortality.

This essay explores the rigorous and often uncomfortable landscape of going concern disclosures under ASC 205-40. It is a subject that combines finance, law, audit readiness, and a dose of humility. For CFOs and controllers operating in venture-backed or thinly capitalized environments, understanding this standard is not a theoretical exercise. It is part of the fiduciary burden of leadership. We will unpack the precise expectations the Financial Accounting Standards Board (FASB) places on management, how auditors evaluate going concern judgments, and how the standard must be applied not just honestly, but with clarity and foresight. The goal is to elevate the discussion around risk, liquidity, and stewardship — not just to pass audit scrutiny, but to strengthen operational credibility in the face of adversity.

The concept of going concern lies at the very foundation of financial reporting. It assumes that a company will continue operating for the foreseeable future. This allows accountants to defer the recognition of certain expenses, amortize costs, and report assets based on their utility rather than liquidation value. The moment this assumption is called into question, the entire architecture of reporting must adapt. Under ASC 205-40, management — not the auditors — holds the initial and primary responsibility for evaluating whether substantial doubt exists about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued.

The word “substantial” here is not casual. It has a defined meaning within the standard. It is meant to trigger a qualitative and quantitative analysis whenever conditions and events, in the aggregate, indicate that it is probable the entity will be unable to meet its obligations as they become due within the twelve-month forward-looking window. This is not the balance sheet date. It is the issuance date. This subtle distinction is essential and frequently misunderstood. It means that management must consider what happens not only as of year-end, but in the days, weeks, or months between year-end and issuance. This includes pending debt maturities, expiring lines of credit, forecasted negative cash flows, adverse legal judgments, or failed equity raises.

The analysis under ASC 205-40 is structured in two sequential steps. First, management must determine if substantial doubt exists based on current conditions. If substantial doubt does exist, the second step evaluates whether management’s plans — those already under way or formally approved before the financial statements are issued — alleviate that doubt. If they do, the going concern disclosure is still required, but with a reassuring tone that the plans mitigate the risk. If they do not, the disclosure must explicitly state that substantial doubt exists and remains unresolved. This dual-step model emphasizes both transparency and proactivity.

In practice, this evaluation is rarely simple. Venture-backed startups and high-growth companies often operate with limited visibility and recurring losses. A Series B company might show a runway of just seven months, with a Series C raise projected to close in the eighth. Does that constitute substantial doubt? What if term sheets are signed but not funded? What if bridge financing has been committed verbally but not documented? These are not just accounting questions. They are questions of judgment, trust, and audit preparedness.

Auditors are required, under PCAOB and AICPA standards, to independently assess going concern risks and evaluate the adequacy of management’s disclosures. They will test assumptions embedded in the cash flow forecasts, scrutinize access to capital, and review the status of financing negotiations. In some cases, they may even request written confirmations from potential investors or lenders. In my experience, the most contentious debates with auditors arise not from revenue recognition or lease accounting, but from the inherently probabilistic nature of going concern analysis. One side is trying to prove a negative. The other is tasked with professional skepticism.

For CFOs, the first line of defense is a rolling twelve-month cash flow forecast tied to real operational data. That forecast should include both base and downside scenarios, with explicit assumptions around revenue timing, cost reductions, funding events, and covenant compliance. It should be updated frequently, reviewed by the board, and grounded in facts — not hopes. Many companies overestimate their ability to execute bridge rounds or close follow-on funding within compressed timelines. The reality is that capital often arrives later than promised and under more stringent terms than expected.

When preparing going concern disclosures, the wording must be clear, precise, and consistent with other parts of the financial statements. Boilerplate language will not withstand audit scrutiny. If management concludes that substantial doubt is alleviated by planned actions, the disclosure must describe those actions, explain why they are feasible, and show how they address the underlying risk. Typical examples include executed term sheets, board-approved cost reductions, cash receipts from customers, or asset sales. The auditors will evaluate whether these plans are probable of being effectively implemented. Vague intentions or undocumented negotiations will not qualify.

In situations where substantial doubt remains, the disclosure must say so unambiguously. This can be difficult for founders and executives to accept, especially in private companies where reputation is closely tied to funding narratives. But opacity is not a viable strategy. Investors are far more forgiving of honest disclosure than of surprises. More than once, I have seen companies attempt to minimize going concern language, only to face follow-up questions from investors and governance bodies that undermine confidence. In these moments, credibility is the most valuable currency.

Some companies wonder whether raising a financing round after the balance sheet date can retroactively resolve a going concern issue. The answer depends on the timing. If the financing is completed before the financial statements are issued, and if it provides sufficient liquidity to cover the forecasted shortfall, then it can be considered in the assessment. However, events that occur after issuance are considered subsequent events and must be disclosed separately under ASC 855, not as part of the going concern analysis. This distinction is especially important in rapidly evolving situations where funding timelines slip or terms change late in the process.

In operational terms, managing going concern risks requires a multidisciplinary approach. Treasury, FP&A, legal, and accounting must align on scenario modeling, financing timelines, and disclosure language. The board must be briefed early and often. Legal counsel should review disclosures to ensure consistency with offering documents and private placement memoranda. And investor relations teams must be prepared to communicate the company’s liquidity strategy with confidence and candor.

There are also systemic implications. A going concern disclosure can trigger clauses in debt agreements, vendor contracts, or equity warrants. It may affect the company’s ability to negotiate favorable payment terms or secure insurance renewals. For companies in the process of registering equity or debt with the SEC, a going concern footnote can slow down the review process or invite questions from staff examiners. These cascading effects are not hypothetical. They are very real and often underestimated.

To manage these complexities, CFOs must treat going concern as part of the enterprise risk management framework, not just an accounting footnote. This includes maintaining contingency plans for failed financings, building relationships with secondary lenders, and embedding runway discussions into quarterly board materials. It also means being honest with oneself. There is no shame in raising capital when the runway is healthy. The best time to extend runway is not when the tank is empty but when the company still has momentum.

In my career, I have witnessed both ends of the spectrum. I have seen companies that disclose going concern risk with clarity and calm, secure funding days later, and turn the page with investor support intact. I have also seen companies that try to obscure the issue, only to trigger panic and reputational damage. The difference lies not in the facts, but in the transparency of how those facts are communicated.

The discipline of financial reporting is built on the assumption of going concern. When that assumption is challenged, the organization must rise to meet the moment with data, discipline, and disclosure. ASC 205-40 does not ask management to predict the future. It asks management to face it. In that sense, it may be the most honest line in the financial statements — a line that says, in essence, we have looked ahead, we understand the risks, and here is where we stand.