How to approach going concern reviews as a trustee

In today's economic climate, reviewing going concern assumptions is not just a box-ticking exercise for the auditors. It is an important review of a charity’s resilience and its ability to continue delivering its mission. Drawing on insights from the recent webinar, 'Strategic restructuring for charities: focusing resources for impact and resilience', this article shares tips on how boards can approach going concern reviews in a practical and useful way.

The technical definition of a going concern is quite narrow. An entity is a going concern unless its management intends to liquidate, cease trading, or has no realistic alternative but to do so. Practically, this requires the trustees to review all available information about the charity’s future for a period of at least twelve months from the date that the financial statements are authorised for issue, i.e. often 18+ months after the financial year-end.

It is important to remember that the primary responsibility for assessing financial viability sits with the board and not the auditors. Trustees must approve the charity’s status as a going concern before the auditors begin their own review.

To conduct this review, auditors will:

• Scrutinise the charity’s budgets and forecasts, challenging whether the underlying assumptions are realistic.
• Look for evidence of sensitivity analysis and reverse stress testing to determine the charity’s actual financial headroom.
• Review the charity’s cash flow projections, which should provide a clear split between restricted and unrestricted funds.
• Examine the nature of the charity’s reserves, existing loan facilities, and future commitments to ensure the organisation's business model remains robust.

While the accounting threshold for departing from the going concern basis is high, boards must look deeper at solvency and liquidity risk. Charity Commission guidance CC12 highlights two critical tests for insolvency: the cash flow test (ability to pay debts as they fall due) and the balance sheet test (asset value exceeding liabilities).

As a charity trustee, your legal duty to pay creditors takes priority over your duty to further the charity’s purposes if the charity is facing insolvency. This means that trustees must be focused on the type and liquidity of the charity’s funds. For example, a charity might have healthy-looking total reserves, but if those funds are restricted or tied up in fixed assets like property, they may not be liquid enough to meet immediate operational needs. To avoid a breach of trust, boards must ensure restricted funds are held in a liquid enough form to settle their specific purposes.

It is human nature to overestimate positive outcomes while underestimating negative effects. That’s why auditors and proactive boards are increasingly looking for evidence-based challenges to the assumptions underlying budgets and forecasts.

It’s not enough to assume donations will remain steady because they have for a decade; boards must look at external trends, such as shifting donor behaviour. A key tool here is reverse stress testing, which helps management identify exactly what would have to happen for the charity to run out of headroom.

Effective boards are also adopting a longer time horizon, looking at three-to-five-year rolling forecasts rather than just the minimum 12-month going concern period. This allows for scenario planning where charities construct several varied but plausible scenarios, ranging from the best-case to the worst-case. That way, charities can identify early warning signs if they are on course to encounter financial difficulties.

When financial gaps are identified, the instinct for many boards is ‘salami slicing’ such as cutting 10% across every department. This reactive approach rarely builds a resilient organisation. True strategic restructuring requires boards to make difficult decisions to prioritise certain programmes over others based on impact and cost.

Reviewing going concern assumptions is a complex task that requires a blend of technical accounting, strategic planning, and realism. The insights shared by presenters Naziar Hashemi and John Tennent in the full webinar provide a much deeper dive into these topics.

• Watch the webinar recording

• Crowe UK’s guide Better Management of Going Concern provides more detail on the technical aspects of going concern and offers specific questions to ask when assessing it.
• FRC guide on the going concern basis of accounting: although written for large companies, this guide contains useful tips and questions that boards should be asking regarding threats to solvency and liquidity.
• The Charity Commission recently updated guide Improving your charity’s finances (CC12) covers charities in financial difficulties, including definitions of insolvency and the legal duties of trustees.
• Crowe UK’s guide Improving efficiency and productivity includes well-known techniques for analysing and removing costs.
• Net assets by funds note: while technically a part of a charity's own accounts rather than an external guide, Naziar highlighted this as an important note and a shorthand way to see and challenge whether restricted funds are held in a liquid enough form.