The going concern assumption means that a company is able to continue its normal business operations and meet its obligations when they fall due. In practice, this is not merely a disclosure in the financial statements but an everyday risk-management question for management: does the company have a realistic plan, sufficient cash flow, and access to financing even if the economic environment deteriorates?
Assessing going concern is not simply good practice; it arises directly from financial reporting requirements, legal frameworks, and auditing standards. The Estonian Accounting Act (RPS §16 (2)) establishes the going concern principle in the preparation of annual financial statements. This means that financial statements are prepared on the assumption that the entity will continue operating and has neither the intention nor the need to cease its activities. If the financial statements are not prepared on a going concern basis, this must be clearly disclosed.
The Commercial Code (for private limited companies §176 and for public limited companies §301) further requires that shareholders adopt decisions when the company’s net assets fall below the statutory requirement. The management board must ensure that the matter is raised in a timely manner and that a shareholders’ meeting is convened.
For auditors, the obligation to evaluate management’s assessment of going concern arises from the International Standard on Auditing ISA 570 (Going Concern). The auditor must critically review management’s assessment and determine how going concern matters should be reflected in the auditor’s report.
However, these requirements also have a very practical dimension. The going concern assessment provides readers of financial statements—such as lenders, suppliers, business partners, employees, or investors—with better insight into whether the company can be relied upon in the future and whether its obligations can realistically be met. A transparent and well-reasoned assessment reduces uncertainty for market participants and helps create a more stable economic environment where decisions are based not on assumptions but on clearly communicated risks and plans.
The going concern assumption also directly affects how financial statements are prepared. When the going concern principle is applied, financial statements are prepared with the assumption that the company will continue operating over the long term: some liabilities will be settled only in the future (including after more than one year), assets are used and depreciated over multiple periods, and expenses and income are allocated over time according to when they arise and are earned.
If the going concern assumption is no longer appropriate, the same long-term perspective cannot be maintained. In such cases, financial statements must be prepared on a different basis (essentially liquidation or realisation principles). Asset measurement then focuses on their recoverable value, liabilities and expenses may materialise more quickly, and the overall logic of financial reporting changes. This is why going concern is a central issue where the assessments of both management and the auditor directly influence how readers understand the company’s actual situation.
The most practical starting point is a simple question: does the company have sufficient liquidity over the next 12 months to meet its obligations and finance operations in the normal course of business?
The assessment should be based on cash-flow forecasts and realistic assumptions supported by contracts, confirmed orders, financing decisions, and management action plans.
Indicators of risk may arise both from financial metrics and from broader economic factors. From a financial perspective, common warning signs include insufficient working capital (short-term liabilities exceeding current assets), recurring negative operating cash flows, persistent losses, and equity (net assets) falling below legal requirements. Loan covenants may also be important: if they have been breached or there is a significant risk of breach, lenders may demand early repayment or refinancing may become uncertain.
Non-financial factors may be equally significant. Examples include dependence on a single major customer or financier, significant increases in input prices, supply chain disruptions, legal disputes or tax claims, and signs of payment difficulties such as overdue supplier balances, payment schedules, or repeated reminders.
In management’s assessment it is particularly important that risks are not merely listed. A concrete action plan is required—such as cost reductions, raising additional capital, selling assets, or refinancing short-term liabilities—together with a timetable and an evaluation of whether these measures are realistic and when they can be implemented.
Under the Accounting Act, management must assess the company’s ability to continue as a going concern for at least 12 months from the balance sheet date (reporting date).
Estonian financial reporting standards (RTJ 1) link the going concern assessment clearly to situations where the cessation of operations is likely. In such cases, financial statements must be prepared on another basis (RTJ 13 “Liquidation and final reports”). According to RTJ 13, a liquidation report must be prepared by an entity that is required to begin terminating its economic activities within the next 12 months.
During an audit, however, the relevant 12-month period is linked to the date of the auditor’s opinion. Therefore, the auditor’s evaluation of going concern relates not to the company’s balance sheet date but to the time when the audit is completed.
In addition, the auditor must consider all relevant information identified during the audit and inquire of management about events that may affect going concern beyond management’s original assessment period. This requirement arises from another auditing standard: ISA 560 (Subsequent events).
Therefore, the audit is not limited to the situation at the balance sheet date. Under ISA 560, the auditor must perform procedures to identify events occurring between the balance sheet date and the date of the auditor’s report that require adjustment or disclosure in the financial statements. If new facts arise after the balance sheet date—such as a financing decision, a covenant breach, or the loss of major customers—these must also be considered both in management’s assessment and in the disclosures in the financial statements.
The auditor evaluates whether management’s going concern assessment covers an appropriate period and is based on reasonable assumptions and sufficient evidence. In practice, this typically involves a critical review of budgets and cash-flow forecasts, evaluating the relevance of key inputs, and performing stress testing—for example, assessing what would happen if sales fall short of expectations, interest rates change, or refinancing is delayed.
The auditor also considers whether events after the balance sheet date and the financial statements themselves support or weaken management’s assessment. If risks exist, the key question becomes whether the financial statements disclose these risks and related uncertainties clearly enough for readers and whether management’s plans for mitigating those risks are adequately described.
If a company belongs to a group and the subsidiary’s going concern depends on support from the parent company, auditors often request a letter of support from the parent.
The purpose of such a letter is to provide the auditor and readers of the financial statements with additional assurance that the owner is willing and able to provide financial support if necessary.
In practice, a support letter usually confirms that the subsidiary can be considered a going concern for at least the next 12 months and includes a commitment to provide immediate financial support in the event of financial difficulties to the extent necessary to meet obligations and continue operations (including, if necessary, additional investment). If the issue relates to insufficient equity, the owner may also confirm a plan to restore the company’s equity to comply with legal requirements by a specified date.
It is important to understand that a support letter is not merely a formality. If the subsidiary’s going concern depends on commitments from the parent company, the auditor must also assess the parent’s (or group’s) actual ability to fulfil those commitments. This involves analysing liquidity and financing capacity: does the parent company have sufficient available funds or secured financing to support the subsidiary if necessary?
If a group issues support letters to several subsidiaries, the auditor must also consider the aggregate risk. The group must be able and prepared to meet the commitments given in all support letters, not just those related to a single company.
In the auditor’s report, two main situations may arise.
First, risks related to going concern may exist and create material uncertainty, but management has properly disclosed these risks in the financial statements together with a plan to address them, and in the auditor’s opinion those plans are feasible and the going concern assumption remains appropriate. In such cases, the auditor includes a separate paragraph titled “Material uncertainty related to going concern”, referring readers to the relevant disclosure in the financial statements.
In this situation, the auditor’s opinion remains unmodified. The paragraph serves only to draw attention to the matter—it is not a qualification of the opinion.
Second, a situation may arise where the auditor cannot obtain sufficient appropriate evidence regarding the company’s ability to continue as a going concern. In such cases, the auditor’s opinion may become modified (qualified opinion, adverse opinion, or disclaimer of opinion), depending on the circumstances and the significance of the issue.
For this reason, it is advisable for management to ensure early on that the going concern assessment and action plan are prepared, properly supported with evidence, and correctly disclosed in the financial statements.
A revised auditing standard addressing going concern will apply to financial statements for periods beginning on or after 15 December 2026.
The objective is to make the treatment of going concern in practice more consistent and transparent. Auditors will be required to apply professional scepticism more prominently throughout the audit and perform more extensive risk assessments to identify early any events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
For readers of the auditor’s report, the most visible change will be the addition of a separate section titled “Going concern” even when no material uncertainty has been identified. If material uncertainty exists, the section “Material uncertainty related to going concern” will still be used.
In the new section, the auditor must clearly state, among other things, that no material uncertainty related to going concern was identified, that the conclusions are based on audit evidence obtained up to the date of the auditor’s report, and that these conclusions do not represent a guarantee that the company will continue operating in the future.
When assessing a company’s ability to continue as a going concern, management should consider three key questions:
Answering these questions helps management form a well-considered overall view: whether going concern risks exist, how significant they are, and what realistic steps can be taken to mitigate them. If the risks are significant, a clear assessment and transparent disclosure help ensure that financial statements provide readers with the right context and that the auditor’s report aligns with the logic set out in the auditing standards.
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