Going Concern - Substantial Doubt Assessment and Footnote Disclosure
Assessing and disclosing substantial doubt about a startup's ability to continue as a going concern when current cash and projected cash flows indicate inability to meet obligations for the next 12 months.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Cash & Cash Equivalents (Current Balance) | Memo: $1,850,000 | - | - |
| Monthly Net Burn Rate (Current) | Memo: ($280,000/month) | - | - |
| Projected Runway from Financial Statement Issuance Date | Memo: 6.6 months | - | - |
| Going Concern Substantial Doubt: YES (< 12 months) | Assessment Memo | - | - |
💡 Accountant's Note
ASC 205-40 requires management to evaluate, at each annual and interim reporting period, whether there is 'substantial doubt' about the entity's ability to continue as a going concern for 12 months from the financial statement issuance date (not the balance sheet date). Substantial doubt exists when it is probable that the entity will be unable to meet its obligations as they come due. With 6.6 months runway: substantial doubt exists. Management must then assess whether their plans (new fundraising round in process, bridge financing, cost reduction) ALLEVIATE the doubt. If plans do not alleviate: disclose substantial doubt exists AND describe conditions/management plans. If plans do alleviate (e.g., Series B closing imminent): disclose conditions that raised doubt AND describe the alleviating factors.
Practitioner & Systems Framework
💻 ERP Architecture
Going concern assessment is required at each financial statement date. For VC-backed startups between funding rounds: this analysis is routine. The assessment must consider: (1) available cash, (2) projected operating cash flows for 12 months, (3) access to committed capital (credit facility, signed term sheet), and (4) management's ability to implement meaningful cost reductions. A Series A term sheet that has not closed is NOT committed capital for going concern purposes — only legally binding commitments count.
⚠️ Audit Flags
Going concern is a critical audit area that every auditor of a startup evaluates. The auditor must independently assess whether conditions raise substantial doubt and whether management's plans are feasible and sufficient. Auditors request: cash projections for 12 months, evidence of any committed financing (signed and unconditional), and signed management representation letters acknowledging the going concern analysis.
📄 Required Documentation
12-month cash flow projection (with key assumptions), current cash balance, monthly burn rate calculation, committed financing documentation (binding term sheets, credit facility commitments), board discussion and minutes on going concern, management's plan to address the going concern.
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