Before signing a Singapore company’s financial statements, directors must decide whether the company is a going concern: whether it can keep operating and paying its debts for the foreseeable future. Under FRS 1 and SFRS(I) 1-1, that assessment looks at least 12 months from the end of the reporting period. If there are material uncertainties, they must be disclosed. The same judgement sits behind the directors’ statement required under section 201 of the Companies Act 1967, which includes the directors’ opinion on whether there are reasonable grounds to believe the company can pay its debts as and when they fall due.
Raffles Corporate Services works with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice. This article is general information only and is not legal advice.
What does “going concern” mean in a company’s accounts?
Financial statements are normally prepared on the going concern basis. This assumes the company will continue in business, so assets are carried at their normal values and liabilities are classified by their usual due dates. Under the presentation standard (FRS 1 for most private companies, SFRS(I) 1-1 for companies using the international-equivalent framework), management must assess the company’s ability to continue as a going concern when preparing the statements. The rules are:
- The going concern basis must be used unless management intends to liquidate the company or stop trading, or has no realistic alternative but to do so.
- The assessment takes into account all available information about the future, covering at least, but not limited to, 12 months from the end of the reporting period.
- Where management is aware of material uncertainties about events or conditions that may cast significant doubt on the company’s ability to continue, those uncertainties must be disclosed.
- If the statements are not prepared on a going concern basis, that fact, the basis used and the reason must be disclosed.
For annual periods beginning on or after 1 January 2027, FRS 118 and SFRS(I) 18 Presentation and Disclosure in Financial Statements replace FRS 1 and SFRS(I) 1-1. Some general requirements of the old standard move into the standard renamed “Basis of Preparation of Financial Statements”. The directors’ responsibility to assess going concern does not go away, but check which standard your year’s statements cite.
Why does the directors’ statement make this personal?
Section 201 requires the directors to lay financial statements before the company and to attach a directors’ statement, signed on behalf of the directors, containing the matters in the Twelfth Schedule. One of those matters is the directors’ opinion on whether, at the date of the statement, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due. If the directors cannot give that opinion without qualification, the statement should be amended to say so, with appropriate disclosure.
The opinion speaks from the date the directors sign, not from the year end. A company with a healthy balance sheet at 31 December that has since lost its banking lines needs the current position reflected. Our guide to section 201, financial statements and the directors’ statement covers the wider duty.
Which warning signs should directors look for?
| Indicator | Why it matters | What to check |
|---|---|---|
| Net current liabilities | Debts due within 12 months exceed assets that will turn into cash in that time | Which creditors are pressing, and whether facilities will be renewed |
| Recurring losses or negative operating cash flow | The business is consuming cash rather than generating it | Whether a clear, costed turnaround plan exists |
| Loan covenant breach or overdue repayments | The lender may be entitled to demand repayment immediately | Waiver letters, revised terms, the lender’s written position |
| Loss of a key customer, supplier, licence or contract | Revenue or operations may not continue as forecast | Replacement pipeline and timing |
| Statutory demands, legal claims or tax arrears | Creditors may start winding-up proceedings | Amounts, deadlines, whether the debts are disputed |
| Reliance on a holding company or director funding | The company survives only if support continues | Whether the supporter is able and committed to provide it |
A statutory demand that goes unanswered can lead to a presumption that the company is unable to pay its debts. Our article on statutory demands under section 125 of the IRDA explains the timeline. In Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd [2021] SGCA 60, the Court of Appeal confirmed that the cash flow test is the test of inability to pay debts in winding up. It looks at whether current assets exceed current liabilities, with “current” read broadly as the next 12 months.
What evidence supports the assessment?
Directors should be able to show how they reached their view. Typical evidence includes:
- A cash flow forecast covering at least 12 months from the year end, and ideally to at least 12 months from the date of signing, built month by month, with assumptions written down and compared against actual results so far.
- Sensitivity cases, for example a key customer paying 60 days late or sales 20% lower, showing whether the company still meets its obligations.
- Financing evidence: facility letters, renewal confirmations, covenant waivers and repayment schedules.
- A letter of financial support from the holding company or a director, stating that the supporter will provide funds so the company can meet its liabilities as they fall due, for a stated period. Directors should also see evidence that the supporter can actually honour it, such as its own financial statements.
- Subordination or deferral letters where related-party loans will not be called while external creditors remain unpaid.
- Board minutes recording the assessment, the evidence considered and the conclusion.
How will the auditor respond?
If the company is audited, the auditor applies Singapore Standard on Auditing 570 on going concern. The auditor evaluates management’s assessment, tests the forecast assumptions and support letters, and reads events after the year end. Likely outcomes are:
- No significant doubt: no going concern wording in the report.
- Material uncertainty, adequately disclosed: the opinion is unmodified, but the report includes a separate section headed “Material Uncertainty Related to Going Concern” pointing readers to the note.
- Material uncertainty, inadequately disclosed: a qualified or adverse opinion.
- Going concern basis inappropriate: an adverse opinion if the statements still use that basis.
A revised international auditing standard on going concern has been issued by the IAASB, and Singapore’s auditing standard is being updated to follow it. Ask your auditor which version applies to your year end.
Does an audit-exempt small company still need to assess going concern?
Yes. Audit exemption removes the audit, not the accounting standards or the directors’ statement. An exempt company’s financial statements must still comply with the applicable standards, including the going concern assessment and any material uncertainty disclosure, and the directors still give the solvency opinion in their statement. With no auditor to challenge the forecast, the directors carry the judgement alone. See our guide to audit exemption for small companies for who qualifies.
What is the risk if directors keep trading when the company cannot pay?
Section 239 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) deals with wrongful trading. Under section 239(12), a company trades wrongfully if, when insolvent, it incurs debts or other liabilities without a reasonable prospect of paying them in full, or becomes insolvent as a result of incurring them. On application by the liquidator or judicial manager, or by a creditor or contributory with leave, the court can make persons who were party to the wrongful trading personally responsible for the company’s debts. Section 239(6) also creates a criminal offence, which the Ministry of Law has said carries a fine of up to S$10,000, imprisonment of up to three years, or both.
A careful going concern assessment is therefore also a record of the directors’ state of mind. Where the honest answer is that the company cannot continue, directors should take advice early. Our articles on when directors must consider creditors’ interests and on creditors’ voluntary winding up explain the next steps.
Directors’ going concern checklist
- Confirm the year-end net current asset or liability position and the cash balance at signing.
- Prepare a monthly cash flow forecast for at least 12 months from the year end, extended past the signing date.
- Test a downside case and record the outcome.
- List every loan, its maturity and covenant status; obtain waivers in writing.
- Obtain any letter of financial support and evidence of the supporter’s capacity.
- Review events after the year end, including lost customers, claims and demands.
- Decide whether a material uncertainty exists and draft the disclosure note.
- Check that the directors’ statement solvency opinion matches the conclusion.
- Minute the decision before signing.
Example: a distributor that loses its largest customer
Example: A hypothetical trading company with a 30 June year end has net current liabilities of S$180,000 and a bank loan whose covenant was breached in May. In August, before the statements are signed, its largest customer gives notice. The directors prepare a 15-month forecast showing a cash shortfall in month five. The parent company issues a letter of financial support for 18 months, and the bank confirms a covenant waiver in writing. The directors conclude the going concern basis remains appropriate, but because the outcome depends on the parent’s continued support, they disclose a material uncertainty. The auditor reviews the parent’s own accounts and includes a “Material Uncertainty Related to Going Concern” section in the report, with an unmodified opinion. The directors sign the solvency opinion on the strength of the support letter and minute their reasoning.
Frequently asked questions
Is a company with negative equity automatically not a going concern?
No. Negative equity is an indicator, not a conclusion. Many companies with accumulated losses continue with shareholder support or improving cash flow. The question is whether the company can pay its debts as they fall due, and whether any uncertainty needs disclosure.
Is a letter of support from a director enough?
Only if the director can genuinely fund the commitment. The letter should state the amount or purpose, the period covered and that the support will not be withdrawn during that period. Evidence of the supporter’s means should be kept on file.
Does a material uncertainty note harm the company?
It can affect how banks, suppliers and investors see the company, but the disclosure is required where the uncertainty exists. Leaving it out exposes directors to a misleading statement and, for audited companies, a modified audit opinion.
What if the directors decide the company cannot continue?
The statements are then prepared on a basis other than going concern, with disclosure of that basis and the reason. Directors should also stop taking on new credit they cannot repay and seek advice on restructuring or winding up.
How far ahead does the forecast need to go?
The accounting standard requires at least 12 months from the end of the reporting period. Where statements are signed several months after year end, extending the forecast to at least 12 months from signing gives a more reliable basis for the solvency opinion.
Official sources: Ministry of Law: IRDA section 239, Sun Electric Power v RCMA Asia case summary, ACRA: new financial statement presentation standards.
Need help with your going concern assessment?
If your company’s year-end accounts raise going concern questions, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133. We can prepare the financial statements and the cash flow forecast behind your assessment, draft the going concern and material uncertainty notes, prepare the directors’ statement and board minutes, and coordinate with your auditors.
Kevin Yeo, Raffles Corporate Services