Going concern assessment for loss-making SaaS

Venture-funded SaaS companies frequently and deliberately run at a loss to fund growth, so a going concern assessment cannot simply point to accumulated losses as automatic evidence of failure, but management must still rigorously evaluate whether the entity can meet its obligations for at least twelve months from the date the financial statements are authorized for issue, and disclose material uncertainties transparently, this is a recurring flashpoint between management's optimism about future funding and the auditor's need for objective, substantiated evidence.

Does the cash runway, based on a detailed monthly forecast, extend at least twelve months from the date the financial statements are authorized for issue? Are any funding commitments relied upon in the assessment legally binding and received, or still subject to due diligence and board approval? Are there any existing or imminent covenant breaches that could accelerate debt repayment or restrict access to committed facilities?

1. Prepare the financial statements on a going concern basis unless management either intends to liquidate the entity or cease trading, or has no realistic alternative but to do so.
2. Assess going concern for a period of at least twelve months from the date the financial statements are authorized for issue (not merely to the next reporting date), incorporating all available information about the future, including events after the reporting period up to the authorization date.
3. Build the assessment on a detailed cash flow forecast reflecting realistic, board-approved assumptions about revenue growth, customer churn, and cost trajectory, cross-checked against the entity's actual historical trends rather than aspirational targets.
4. Evaluate the reliability and committed status of mitigating factors: distinguish signed, legally binding funding commitments (e.g., a closed and funded financing round, a committed and available credit facility) from uncommitted intentions (e.g., verbal investor interest, an unsigned term sheet, or a funding round still in due diligence).
5. If, after this evaluation, material uncertainties exist that may cast significant doubt on the entity's ability to continue as a going concern, disclose those uncertainties clearly even though the going concern basis remains appropriate.
6. Only depart from the going concern basis (preparing on a liquidation or break-up basis) if management has actually decided, or has no realistic alternative but, to liquidate or cease operations.

The going concern assessment is not a measurement exercise for a specific balance but a holistic judgment supported by quantitative evidence: build a detailed monthly cash flow forecast covering at least the twelve-month assessment window, incorporating current cash and committed facilities, expected customer collections net of realistic churn, and committed (not merely budgeted) operating and capital expenditure. Stress-test the forecast against reasonably possible downside scenarios (e.g., slower-than-planned new sales, delayed funding) rather than relying on a single base-case projection, and quantify the runway (months of cash remaining) under each scenario to assess the severity and likelihood of a shortfall within the assessment window.

Disclose: the fact that management has assessed going concern and concluded the basis remains appropriate (or otherwise); where material uncertainties exist, a clear description of the events or conditions giving rise to doubt, management's plans to address them, and an explicit statement that a material uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern; the key judgments and assumptions underlying the assessment, including the assessment period used and reliance placed on any funding commitments; if the entity departs from the going concern basis, that fact, the basis actually used, and the reason. Note that where a material uncertainty is appropriately disclosed, the auditor's report may include a distinct section drawing attention to it without necessarily qualifying the opinion.

• Treating a signed but unfunded term sheet, or informal investor verbal interest, as sufficient evidence to conclude no material uncertainty exists
• assessing going concern only through the next annual reporting date rather than the full twelve months from the authorization date
• failing to update the assessment for events after the reporting period but before authorization (e.g., a funding round falling through) that are directly relevant
• presenting an overly optimistic base-case cash flow forecast without stress-testing downside scenarios that are reasonably possible given the entity'
• s actual burn and churn history
• omitting clear disclosure of material uncertainty even though management privately has significant doubt, on the mistaken belief that disclosure itself will trigger the very funding or customer confidence problems it describes.