Going concern assessment

The term going concern assessment in the insolvency context was first introduced by the German Federal Court of Justice (BGH) in 1992. In reference to over-indebtedness testing, the Court stated that “the company’s financial strength must, in all likelihood, be sufficient to continue its operations in the medium term (‘survival’ or ‘going concern assessment’)” (BGHZ 119, 201, 215, para. 15). The insolvency-related going concern assessment is therefore closely linked to the insolvency grounds of illiquidity (§ 17 InsO) and imminent illiquidity (§ 18 InsO).

With the introduction of the Financial Market Stabilisation Act (FMStG), the going concern assessment gained increasing importance. Since 18 October 2008, § 19 para. 2 of the German Insolvency Code (InsO) has included an additional clause: over-indebtedness exists if the debtor’s existing liabilities are no longer covered by its assets, “unless the continuation of the business is predominantly likely under the circumstances.” If a positive insolvency-related going concern assessment is present, the exclusive examination of mathematical over-indebtedness is no longer required.

In this context, the insolvency-related going concern assessment is not about over-indebtedness, positive earnings, or the company’s competitiveness. Instead, it focuses solely on the company’s economic viability, ultimately resulting in a liquidity-based assessment.

In substance, the insolvency-related going concern assessment answers the question of whether the company, while meeting all of its payment obligations, will be able to continue its business operations on a sustainable basis. According to the recommendations of the Legal Committee of the IDW (Institute of Public Auditors in Germany), a meaningful and plausible restructuring concept should first be developed, followed by a restructuring plan derived from it. The going concern assessment should then be based on the results of the integrated business planning.

A key benchmark in practice for preparing an insolvency-related going concern assessment is IDW S11 (“Assessment of the Existence of Grounds for Opening Insolvency Proceedings”). This standard, which came into effect in early 2015, replaced IDW PS 800 (Assessment of Impending Insolvency) and IDW FAR 1/1996 (Assessment of Over-Indebtedness). IDW S11 operationalises the legal requirements for conducting a going concern assessment, thereby reducing uncertainties in its preparation. The going concern assessment thus represents a qualitative, evaluative overall judgment on a company’s viability in the foreseeable future.

As a guideline, the Legal Committee of the IDW generally recommends a forecast period of 12 months (for over-indebtedness assessments) and 24 months (for imminent illiquidity assessments) when preparing an insolvency-related going concern assessment.

The commercial going concern assessment is anchored in German commercial law and based on § 252 para. 1 no. 2 of the German Commercial Code (HGB): “In valuation, the assumption of going concern shall be made, unless factual or legal circumstances oppose it.” This principle is also referred to as the “going concern assumption.”

In this context, the assessment goes beyond the liquidity-focused perspective of the insolvency-related going concern assessment. It does not merely test whether liquidity is ensured; instead, it must comprehensively evaluate whether any circumstances stand in the way of the company’s continuation. Accordingly, with respect to the legal framework for determining insolvency filing obligations, the analysis must consider not only liquidity (§ 17 InsO) but also include a net asset forecast to determine whether sufficient assets exist to cover liabilities during the forecast period (§ 19 InsO).

Thus, the definitional focus on liquidity in the insolvency-related assessment is expanded in the commercial going concern assessment to include the aspect of indebtedness. In addition, legal prohibitions or regulatory requirements that may restrict operations and potentially force a cessation of business must be taken into account. Practical circumstances raising doubts about the company’s ability to continue may also arise in the form of technical, political, or environmental risks. For this reason, the commercial going concern assessment goes significantly beyond the insolvency-related going concern assessment.

The key benchmark in practice for evaluating a commercial going concern assessment is IDW PS 270: “Assessment of the continuation of business operations in the context of an audit.” According to IDW PS 270, the going concern assumption can be upheld if the company has achieved sustainable profits in the past, can easily access financial resources, and is not facing imminent balance sheet over-indebtedness. The forecast period for evaluating these cumulatively required criteria is at least 12 months, as defined by IDW PS 270.