Financial resilience – The going concern assumption under commercial law

published on 12 September 2025 | reading time approx. 4 minutes

The German economy remains under pressure. In 2024, 22.4% more companies filed for insolvency than in the previous year, 2023 (source: Federal Statistical Office). There appears to be no sign of the situation easing (yet) in the current year either. Companies of almost all sizes and in all sectors are affected by ongoing geopolitical tensions and trade conflicts, including with the US.

Regulatory framework

When valuing the assets and liabilities reported in the annual financial statements under commercial law, Section 252 (1) No. 2 of the German Commercial Code (HGB) stipulates that the going concern principle must generally be assumed, unless actual or legal circumstances prevent the company from continuing its operations. The assessment must be made by the company's legal representatives and must cover a period of at least 12 months from the balance sheet date. Pursuant to Section 1 of the German Act on the Stabilization of Companies (StaRUG), the bodies appointed to manage the company are also obliged to continuously monitor developments that could jeopardize the company's continued existence. If events and circumstances are identified that could raise significant doubts about the company's ability to continue as a going concern, the forecast horizon begins and covers 12 months from the date of preparation of the annual financial statements.

Significance of debt financing and covenants

It is not only in economically and geopolitically challenging times that it is important to check whether such circumstances exist. In the case of a debt-financed structure, covenants are usually agreed in the loan agreements, which must be complied with for the duration of the debt financing. Early and continuous monitoring of covenant compliance is essential for this purpose. By monitoring and identifying potential covenant breaches, countermeasures can be taken at an early stage to avoid a breach of the agreed covenants and thus the risk of the lender exercising its extraordinary right of termination and the loss of a potentially significant financing component.

On May 7, 2025, the Institute of Public Auditors in Germany (IDW) published a question and answer paper on the topic of “Going Concern and Insolvency”. This paper addresses frequently asked questions in the context of preparation, compilation, and auditing. With regard to a covenant breach, a distinction must be made as to when this occurs or will occur. If this breach occurs by the end of the preparation period for the annual financial statements, it can be remedied by means of an agreement with the lender, who waives his right to extraordinary termination of the loan agreement (so-called waiver). In the event of a (potential) breach during the forecast period, a comprehensive assessment must be carried out in the form of an overall review. In any case, if there are covenant breaches, a suspension of the respective covenant should be agreed with the lender in order to secure the financing commitment in the forecast period.

Financing that becomes due within the forecast period must be refinanced or repaid with a high degree of probability. This high degree of probability of refinancing or possible repayment must be substantiated and documented by the management body with evidence in the form of contracts or other documents. However, a departure from the going concern assumption is mandatory if the legal representatives are forced to liquidate the company or cease business activities, i.e., if there is no realistic alternative. The going concern assumption therefore continues to apply even in the event of insolvency if, for example, a credible insolvency plan is in place and no decision to liquidate has been made.

Conclusion

Companies should keep an eye on developments and implement an appropriate monitoring system so that they can take suitable measures at an early stage. Companies do not find themselves in a liquidity crisis without warning. Every liquidity crisis is preceded by a strategy crisis and a resulting earnings crisis. Effective early crisis detection management therefore begins well before the stage of liquidity problems.