Going concern assumption
The going concern assumption (continuïteitsveronderstelling) is the premise that a company will continue its activities. If this is not tenable, valuation and notes must be reassessed.
What does going concern assumption mean?
The going concern assumption (continuïteitsveronderstelling) is the premise that a company will continue its activities. If this is not tenable, valuation and notes must be reassessed.
The annual accounts are in principle prepared on the assumption that activities continue. When lasting continuation is no longer plausible, valuation and notes must be reassessed. Temporary liquidity pressure alone does not yet prove discontinuity.
How does it work?
Art. 2:384(3) DCC bases valuation on the assumption that the activities will continue, unless that assumption is incorrect or its correctness is subject to reasonable doubt. In that case the board sets this out in the notes, with the effect on equity and result. The board tests the assumption when preparing every set of annual accounts, alongside the liquidity forecast, the repayment obligations and the available credit.
RJ 170 distinguishes two situations. With serious uncertainty the legal entity cannot meet its obligations on its own, but there is a real chance that it continues with the cooperation of bank, shareholders or creditors; the policies then remain on a going-concern basis and the notes describe the circumstances. With unavoidable discontinuity, continuation is impossible and the annual accounts move to liquidation policies. In addition there is a planned, solvent termination: the legal entity was established for a fixed period or is being dissolved and is expected to pay all its debts. The ordinary policies then remain, with an explanation in the notes (RJ 170.104; for micro and small RJk A2.211a). The accountant includes a material uncertainty about continuity in his report (art. 2:393(5)(h) DCC).
Example
A BV closes 2025 with a € 40.000 loss and negative equity of € 25.000. Bank balance € 12.000; due within a year are € 85.000 of accounts payable and € 30.000 of repayment on the bank loan. The forecast shows a shortfall of € 45.000 in June 2026. The shareholder declares in writing that he will inject € 60.000 on a subordinated basis and will not call in his existing loan. The board values on a going-concern basis and puts the uncertainty and the commitment in the notes. Without a commitment and without another plan, the € 50.000 of equipment would be written down to its sale proceeds, for example € 15.000.
In the annual accounts
General policy in the notes; can affect all balance sheet valuations.
Difference from negative equity
Negative equity means that the liabilities on the balance sheet exceed the assets. That is a signal and not an end: a BV with a subordinated loan from its shareholder and positive cash flows can carry on for years. Continuity is about whether the company can keep paying its obligations. See Negative equity: is the BV bankrupt?
Common mistakes
- Taking liquidation value in every loss-making period
- Concealing serious uncertainty
What should you watch for?
- In case of a loss or an expiring credit facility, make a monthly liquidity forecast and keep it with the annual accounts.
- Record commitments from the bank or shareholder in writing before preparing the accounts. See Continuity when financing is not yet arranged.
- A micro legal entity is exempt from the prescribed notes (art. 2:395a(6) DCC), but the valuation rule itself applies to it too. From small upwards, the explanation belongs in the notes that are filed.
Legal basis and source
art. 2:384(3) DCC
Frequently asked questions
Who assesses continuity?
The board, when preparing the annual accounts. For a legal entity subject to the audit requirement, the accountant tests that assessment and reports a material uncertainty in his report.
What changes in the annual accounts if continuity lapses?
If discontinuity is unavoidable, valuation moves to the liquidation basis: assets at the expected realisable value, liabilities at the amount needed to settle them and an item for the costs until settlement. The notes describe the cause and the expected manner of liquidation (RJ 170; RJk A2.213). If the legal entity ceases operations as planned and is expected to pay all its debts, the ordinary policies continue to apply and you explain this (RJ 170.104; RJk A2.211a).
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