Climate risk and going concern

When can climate risk affect going concern?

When a climate-related event or change could, within the assessment period, leave a company unable to meet its obligations: lenders or insurers withdrawing from a sector, a refinancing that depends on meeting sustainability-linked covenants, a physical event that halts production, a ban or tax that removes the main source of revenue, or litigation. For most companies these risks matter over longer horizons and are reflected through impairment, useful lives and provisions instead. See climate risk in the financial statements.

What does the going concern assessment require?

Financial statements are prepared on a going concern basis unless management intends to liquidate the company or stop trading, or has no realistic alternative. Management considers all available information about the future, for at least, but not limited to, 12 months from the end of the reporting period: forecasts, financing and covenants, and events such as the loss of key customers, markets or licences. From annual periods beginning on 1 January 2027, IFRS 18 moves these requirements from IAS 1 to IAS 8, renamed Basis of Preparation of Financial Statements, without changing them.

Going concern in practice: a coal-fired power generator

A generator with mainly coal-fired plants has EUR 300 million of bank debt due in nine months. Two of its lenders have stopped financing coal. It has EUR 40 million of cash, expects EUR 45 million of operating cash flow and EUR 15 million of essential capital spending over the next 12 months, has agreed to sell its renewable energy subsidiary for EUR 200 million subject to regulatory approval, and has a commitment for a new EUR 100 million facility conditional on that sale.

If the sale completes, cash in 12 months is EUR 70 million. If approval is delayed beyond the debt's maturity, neither the sale proceeds nor the conditional facility arrive in time, cash falls EUR 230 million short, and the company would need its lenders to extend. Management concludes that the going concern basis is appropriate, because it expects approval and lenders have indicated willingness to extend, but that a material uncertainty exists. It discloses the uncertainty, the dependence on the sale and refinancing, and that it may be unable to realise its assets and discharge its liabilities in the normal course of business. See climate risk in impairment testing.

What must be disclosed?

• Material uncertainty: events or conditions that may cast significant doubt on the company's ability to continue as a going concern, after considering management's plans.
• Close calls: the IFRS Interpretations Committee confirmed in 2014 that where management concludes there is no material uncertainty, but that conclusion involved significant judgement, the judgement should be disclosed.
• Not a going concern: the fact, the reasons and the basis used instead.

Climate-related events or conditions that contribute to the assessment should be named specifically, not left in general risk wording. See connected information.

What about climate risks beyond 12 months?

A risk that could threaten the business in five or ten years does not change the basis of preparation, but it may need disclosure as a significant judgement or source of estimation uncertainty, and it affects impairment, useful lives and decommissioning provisions. Companies applying the UK Corporate Governance Code also give a longer-term viability statement, and IFRS S2 requires an assessment of climate resilience using scenario analysis. See climate and useful lives and climate scenario analysis.

How are auditors' duties changing?

ISA 570 (Revised 2024), effective for audits of periods beginning on or after 15 December 2026, requires auditors to evaluate management's assessment whether or not events or conditions have been identified, to challenge the method, assumptions and data for bias, and to cover a period of at least 12 months from the date the financial statements are approved, asking management to extend its assessment if it is shorter. Auditor's reports must say more about going concern. Climate assumptions in forecasts will get the same scrutiny as any other. See auditing estimates.

How does US GAAP differ?

ASC 205-40 requires management to assess whether there is substantial doubt about the company's ability to continue as a going concern within one year after the date the financial statements are issued, considering whether its plans alleviate that doubt, with disclosures in either case. The look-forward period runs from the issue date, not the balance sheet date, and the threshold is substantial doubt rather than material uncertainty. See climate commitments and provisions.

This guide is general information. It is not tax or legal advice for your situation.