{"id":6477,"date":"2026-07-14T19:43:01","date_gmt":"2026-07-14T17:43:01","guid":{"rendered":"https:\/\/maraz.es\/?p=6477"},"modified":"2026-07-22T17:02:56","modified_gmt":"2026-07-22T15:02:56","slug":"companies-in-crisis-and-the-going-concern-principle","status":"publish","type":"post","link":"https:\/\/maraz.es\/en\/companies-in-crisis-and-the-going-concern-principle\/","title":{"rendered":"Companies in crisis and the going concern principle"},"content":{"rendered":"<p><strong>Companies in crisis and the going concern principle: there is one question almost no board asks in time, and yet it changes everything \u2014 are we still a going concern?<\/strong><\/p>\n<p>It is not a philosophical question, nor a formality for the notes to the accounts. It is the line that separates a balance sheet worth one thing from a balance sheet that, overnight, is worth considerably less. And it is also the line beyond which a director stops being protected and starts answering with their own assets.<\/p>\n<p><strong>In the Spanish mid-market \u2014family-owned, industrial companies, with bank debt and a pool of lenders\u2014 that question tends to arrive late and badly framed. Having losses is confused with being in cause for dissolution; being in cause for dissolution, with being insolvent; and being insolvent, with having to liquidate. These are four different things, with four different accounting and legal consequences.<\/strong><\/p>\n<p>This article maps that terrain from the standpoint of whoever has to make the decision: the CFO \u2014in-house or fractional\u2014, the directors, the CEO. And it does so by focusing where it really hurts: on what happens to the accounts, to equity, to what the auditor says and to what the bank will do when it reads them.<\/p>\n<h2><strong>When the principle is deemed to apply \u2014 and when it does not<\/strong><\/h2>\n<p>Let us start with the essentials, plainly. <strong>The going concern principle is the default assumption of all accounting.<\/strong> The Conceptual Framework of the Spanish General Accounting Plan (PGC, Royal Decree 1514\/2007) states it clearly: <strong>unless there is evidence to the contrary, the company&#8217;s management is assumed to continue for the foreseeable future. That is why assets are not valued at what they would fetch in a forced sale, but by their capacity to keep generating business: they are depreciated systematically, measured at value in use, classified according to the normal operating cycle. The entire accounting edifice presumes the company is still alive.<\/strong><\/p>\n<p>The key \u2014and here is the nuance almost nobody explains well\u2014 is that <strong>this principle is not abandoned just because things are going badly<\/strong>. <strong>It is abandoned only when management decides to liquidate the company, cease trading, or concludes there is no realistic alternative to doing so. It is a decision, not a thermometer. A company can have heavy losses, negative equity, breached covenants and cash-flow strain, and<\/strong> <strong>still prepare its accounts on a going concern basis<\/strong>, provided there is a realistic plan to pull through.<\/p>\n<p><strong>There are, therefore, three states that should not be mixed up:<\/strong><\/p>\n<ul>\n<li><strong>Company fully a going concern.<\/strong> The principle applies normally. There are no material doubts about continuity.<\/li>\n<li><strong>Going concern with material uncertainty.<\/strong> There are events casting significant doubt \u2014recurring losses, debt maturing without refinancing in place, dependence on a single customer\u2014, but management concludes there is still a realistic way out. Here the principle continues to apply, but with an added obligation: to disclose that uncertainty in the notes. This is the grey zone, and it is where most mid-market matches are played.<\/li>\n<li><strong>Breach of the principle.<\/strong> Management determines it will liquidate or cease trading, or that there is no realistic alternative. Only then is the assumption abandoned and a different accounting framework kicks in: that of the ICAC Resolution of 18 October 2013.<\/li>\n<\/ul>\n<p>Hold on to this idea, because it orders everything else: <strong>the problem is not having doubts, but not documenting them; and it is not abandoning the principle, but abandoning it late \u2014 or keeping it when it no longer fits.<\/strong> Both mistakes have names and surnames in the Commercial Code, the Companies Act and the Insolvency Act.<\/p>\n<h2><strong>The grey zone: doubting without ceasing to be a living company<\/strong><\/h2>\n<p><strong>When directors are aware of significant uncertainties about continuity but conclude that a realistic alternative to liquidation still exists, the accounting response is not to change framework: it is to keep applying the going concern principle and to say so.<\/strong> Those uncertainties must be disclosed in the basis-of-preparation section of the notes, together with the assumptions used and the reasons. The significance of the doubt can be mitigated by concrete, credible plans: the sale of a non-core asset, the renegotiation of a loan, a capital increase, a participating loan from the shareholders.<\/p>\n<p>The ICAC Resolution of 2013 itself offers, almost as a gift to any diligent board, a catalogue of warning signals. It is worth pinning to the wall and reviewing every quarter. They fall into three families.<\/p>\n<h3><strong>Financial indicators<\/strong><\/h3>\n<p><strong>Negative equity<\/strong> or <strong>negative working capital<\/strong>; <strong>loans close to maturity with no realistic prospect of renewal<\/strong>; excessive reliance on short-term debt to finance long-term assets; negative operating cash flows; key financial ratios deteriorating; substantial operating losses; inability to pay on the due date; <strong>covenant breaches<\/strong>; suppliers switching from credit to cash on delivery; and inability to finance essential investment.<\/p>\n<h3><strong>Operating indicators<\/strong><\/h3>\n<p>Management&#8217;s intention to liquidate or cease trading; departure of key executives without replacement; loss of a market, a customer or a principal supplier; labour disputes; supply shortages; or the emergence of a highly successful competitor.<\/p>\n<h3><strong>Legal and other indicators<\/strong><\/h3>\n<p>Breach of legal or capital requirements; litigation which, if lost, would generate unbearable claims; adverse regulatory changes; or uninsured catastrophes.<\/p>\n<p><strong>A quantitative point we use systematically at Maraz in restructuring analysis: the<\/strong> <strong>debt service coverage ratio (DSCR)<\/strong>, <strong>which relates available cash flow to debt service \u2014principal plus interest\u2014<\/strong>. When it falls persistently below 1.0x, the financial structure is unsustainable without refinancing, extending maturities, negotiating grace periods or converting debt into equity. It is not just another signal: it is usually the one that anticipates generalised default and, with it, the slide into insolvency.<\/p>\n<p>Monitoring this indicator early is one of the functions where the support of a <a href=\"https:\/\/maraz.es\/en\/fractional-cfo\/\">fractional CFO<\/a> makes the difference. None of these indicators alone forces the abandonment of the going concern principle, but their presence does force two things: documenting the assessment in writing and, where the doubt is significant, disclosing it.<\/p>\n<h2><strong>What happens to the accounts when the principle falls away: the ICAC Resolution of 18 October 2013<\/strong><\/h2>\n<p>When management concludes there is no alternative to liquidation \u2014or when the legal milestone of corporate dissolution or the opening of the insolvency liquidation phase occurs\u2014, <strong>the accounts stop being prepared on a going concern basis and become governed by the ICAC Resolution of 18 October 2013.<\/strong> It is mandatory for any entity applying the PGC or the SME PGC, regardless of its legal form.<\/p>\n<p>It is worth dismantling a common myth here. The Spanish legislator did not copy the US &#8220;liquidation accounting&#8221; model, which replaces the balance sheet with financial statements bearing new nomenclature. The ICAC&#8217;s philosophy was the opposite \u2014so-called &#8220;preservation of the standard&#8221;\u2014: <strong>the PGC balance sheet model is kept and what changes is the essential thing, namely measurement. The effect on equity, however, is usually devastating. Let us look at it line by line.<\/strong><\/p>\n<h3><strong>Assets: from value in use to liquidation value<\/strong><\/h3>\n<p><strong>Assets previously measured at cost stop being measured at their value in use and are measured at<\/strong> <strong>the lower of carrying amount and liquidation value<\/strong>: what would be obtained from their sale or disposal, less the costs necessary to realise it. That value normally coincides with fair value less costs to sell, but is often lower because of the &#8220;forced transaction&#8221; effect: the market knows you have to sell, and adjusts the price downward. This is where the first major blow to equity occurs.<\/p>\n<h3><strong>Fixed assets stop being depreciated and goodwill disappears<\/strong><\/h3>\n<p><strong>Under the liquidation framework, depreciable fixed assets stop being depreciated<\/strong> \u2014without prejudice to any impairment that applies\u2014. And <strong>goodwill, which is nothing more than the expectation of future profitability of a going concern, is written off in full<\/strong>: in a cessation scenario, that expectation has no realisable value. The loss is taken to profit or loss or to reserves. For groups that grew through acquisitions, writing off goodwill can wipe out a very substantial part of shareholders&#8217; funds in one stroke.<\/p>\n<h3><strong>Inventories, investments and deferred tax assets<\/strong><\/h3>\n<p><strong>Inventories are measured at their net realisable value in the liquidation scenario<\/strong>.<\/p>\n<p><strong>Investments in group companies and associates are recalculated by reference to the liquidation value of the investee&#8217;s net assets<\/strong>.<\/p>\n<p>And there is one item that is almost always forgotten and can catch you out: <strong>deferred tax assets<\/strong> \u2014tax loss carryforwards and pending deductions\u2014 represent the right to pay less tax in the future against future profits. <strong>If the business disappears, that expectation of profits disappears, and with it the asset.<\/strong> It must be written off almost entirely, unless it is highly probable that taxable profits will be generated during the liquidation itself. Another direct, and often unexpected, hit to equity.<\/p>\n<h3><strong>Liabilities: no discount here<\/strong><\/h3>\n<p><strong>With liabilities, the criterion is preservation. Debts are kept at their amortised cost<\/strong>. The ICAC expressly rejected the temptation to write them down for the company&#8217;s greater default risk: it would be absurd for a company in difficulty to present an artificially healthy liability precisely because it is worse off. Breach of the principle, moreover, <strong>does not accelerate the maturity<\/strong> of debts: they remain payable on the agreed terms, unless the contract provides for early maturity on dissolution or liquidation, in which case the debt is reclassified to current liabilities at its redemption value. In an insolvency liquidation, the opening of the phase does trigger the early maturity of deferred insolvency claims.<\/p>\n<h3><strong>New provisions for cessation<\/strong><\/h3>\n<p><strong>The cessation scenario gives rise to new obligations:<\/strong> redundancy payments, penalties for early termination of leases, unfavourable supply contracts, decommissioning costs. They are recognised at their best estimate. That said, you cannot bring forward all the future costs of the liquidation \u2014liquidators&#8217; fees, keeping offices running during the process\u2014: those continue to be recognised on an accruals basis, as they are incurred.<\/p>\n<p><strong>The sum of all the above explains why the transition to the liquidation framework is<\/strong> <strong>the moment of greatest destruction of accounting value in a company&#8217;s life<\/strong>: <strong>assets fall, intangibles disappear, tax credits evaporate and new provisions surface, while liabilities remain intact<\/strong>. The equity resulting from that snapshot is the one that shareholders, creditors and the judge will see, in all its rawness.<\/p>\n<h2><strong>Equity and the two clocks that start ticking<\/strong><\/h2>\n<p><strong>This is where accounting stops being a technical exercise and becomes a matter of personal liability. Two thresholds, two clocks, two two-month deadlines that may overlap.<\/strong><\/p>\n<h3><strong>The equity shortfall and the duty to dissolve<\/strong><\/h3>\n<p>Article 363.1.e) of the Companies Act (LSC) requires the company to be dissolved when losses reduce equity below half the share capital, unless capital is increased or reduced sufficiently. Faced with that cause, directors must call a general meeting within <strong>two months<\/strong> (art. 365 LSC) to dissolve, remove the cause or file for insolvency. If they fail to do so, they are jointly and severally liable for the company&#8217;s subsequent debts (art. 367 LSC), without the creditor having to exhaust the company&#8217;s assets first. It is one of the most feared \u2014and most frequent\u2014 routes to liability in practice.<\/p>\n<p>A technical detail with enormous practical consequences: the test does not use accounting equity exactly, but equity &#8220;for company-law purposes&#8221; under article 36.1.c) of the Commercial Code. And there lies a decisive lever: <strong>participating loans count as equity<\/strong> for the purposes of capital reduction and dissolution (art. 20 of Royal Decree-Law 7\/1996).<\/p>\n<p>An illustrative example: a family-owned industrial company with share capital of \u20ac100,000, reserves of \u20ac20,000 and accumulated losses of \u20ac85,000 has equity of \u20ac35,000, below half the capital (\u20ac50,000): it is in cause for dissolution. If a shareholder grants it a participating loan of \u20ac30,000, equity for company-law purposes rises to \u20ac65,000 and the cause is removed. The same money as an ordinary loan would not have that effect. Knowing this can be the difference between having to call a dissolution meeting or not.<\/p>\n<h3><strong>Insolvency and the duty to file<\/strong><\/h3>\n<p><strong>The other clock is the insolvency one.<\/strong> Article 5 of the Consolidated Insolvency Act (TRLC) requires the debtor to file for insolvency within <strong>two months<\/strong> of becoming aware, or of when it should have become aware, of its current insolvency \u2014the inability to meet its due obligations on a regular basis\u2014. And here the crucial warning, upheld by the Supreme Court (STS 122\/2014): <strong>an equity shortfall and insolvency are not the same thing<\/strong>. A company can have equity below half its capital and still pay on time because it has financing; and conversely, it can have a positive balance sheet and be insolvent through lack of liquidity. They are two autonomous duties that must be monitored separately.<\/p>\n<h2><strong>Careful: filing for insolvency is not the same as abandoning the principle<\/strong><\/h2>\n<p><strong>It is one of the most common and most costly mistakes. The mere filing for insolvency does not determine the application of the liquidation framework. Once insolvency is declared, and unless there is evidence to the contrary, the going concern principle remains fully in force:<\/strong> trading is not interrupted and the obligation to prepare and audit annual accounts continues (art. 46 TRLC). During the common phase it is not known how the proceedings will end: they may end in an arrangement \u2014continuity\u2014 or in liquidation.<\/p>\n<p><strong>Only the opening of the insolvency liquidation phase<\/strong> requires abandoning the principle and adopting the framework of the 2013 Resolution. Meanwhile, insolvency is an event that requires assessing the impairment of receivables, but it does not break the ordinary accounting framework. In any case, it is worth having the range of exits in mind before reaching that point: we have developed it in our analysis of <a href=\"https:\/\/maraz.es\/en\/corporate-financial-restructuring\/\">corporate financial restructuring options<\/a>.<\/p>\n<h2><strong>When the principle holds: arrangement, restructuring and the tax trap of debt haircuts<\/strong><\/h2>\n<p><strong>If the company and its advisers design a realistic viability plan and a credible arrangement or restructuring plan, the going concern principle remains the mandatory framework. And here there are two accounting and tax effects a CFO must anticipate, because they can turn good news into a cash-flow problem.<\/strong><\/p>\n<h3><strong>The approved arrangement and the income from the haircut<\/strong><\/h3>\n<p>When the judge approves an arrangement with a haircut \u2014debt reduction\u2014 and a standstill \u2014deferral\u2014, <strong>the difference between the carrying amount of the old debt and the new value after the haircut is recognised as financial income in the profit and loss account for the year.<\/strong> For accounting purposes, it is income that improves the result and equity.<\/p>\n<p>ICAC doctrine (query 1 of BOICAC 76\/2008) qualifies this by requiring an initial analysis of whether the modification of the debt is substantial \u2014it is deemed to be so when the present value of the new cash flows differs by at least 10% from the original\u2014: if the haircut does not exceed that threshold, the balance is not altered and no income is recognised. The restructured debt is also remeasured by applying the new rates and schedules, recalculating the amortised cost.<\/p>\n<h3><strong>The trap: paying tax on money that never came in<\/strong><\/h3>\n<p><strong>Here is the risk many discover too late. That accounting income from the haircut, being purely accounting, could trigger Corporate Income Tax just when the company has no cash.<\/strong> The legislator foresaw the problem: <strong>article 11.13 of the Corporate Income Tax Act<\/strong> establishes a special rule.<\/p>\n<p>Income from insolvency haircuts and standstills is not taxed all at once: it is included in the taxable base <strong>as the financial expenses of that same restructured debt are recognised, and up to the limit of that income<\/strong>. If the income from the haircut exceeds the outstanding financial expenses, the excess is spread proportionally over the life of the payment plan. In practice, this defers the tax impact and avoids strangling liquidity at the worst possible moment. It is a rule of tax neutrality that a good adviser knows and exploits; ignoring it can cost a tax bill the company is in no position to face.<\/p>\n<h2><strong>What the auditor will say: ISA-ES 570 and material uncertainty<\/strong><\/h2>\n<p><strong>Going concern is not just management&#8217;s concern. The auditor, under ISA-ES 570, has to assess independently whether the use of the principle is appropriate and whether there is a material uncertainty about continuity, with a minimum horizon of twelve months<\/strong>. And what they conclude translates, almost mechanically, into the tenor of their report. It is worth knowing the map, because how the bank reads the accounts depends on it.<\/p>\n<ul>\n<li><strong>Principle well applied + material uncertainty properly disclosed<\/strong> \u2192 unqualified (unmodified) opinion, but with a specific section headed &#8220;Material uncertainty related to going concern&#8221;, referring to the relevant note. The opinion is not modified, but the signal is there.<\/li>\n<li><strong>Material uncertainty NOT properly disclosed<\/strong> \u2192 qualified or adverse opinion, depending on the magnitude.<\/li>\n<li><strong>Improper use of the principle<\/strong> (they should have used the liquidation framework and did not) \u2192 adverse opinion.<\/li>\n<li><strong>Liquidation framework properly applied and disclosed<\/strong> \u2192 unqualified opinion, where appropriate with an emphasis-of-matter paragraph.<\/li>\n<li><strong>Multiple significant uncertainties affecting the accounts as a whole<\/strong> \u2192 in exceptional cases, disclaimer of opinion.<\/li>\n<\/ul>\n<p><strong>That &#8220;material uncertainty&#8221; section is not a qualification, but the market reads it almost as if it were. Hence the importance of the note in the accounts being impeccably drafted<\/strong>: the same fact, well explained with a credible plan, can support an unqualified opinion; badly explained, it invites a qualification.<\/p>\n<h2><strong>What the bank will do when it reads them<\/strong><\/h2>\n<p><strong>Everything above converges on a single reader whose reaction can accelerate or slow the crisis: the bank. Lenders do not read the accounts out of curiosity; they read them to decide whether to keep the lines open, enforce guarantees or bring the company to the table to renegotiate. And there are three triggers a CFO must anticipate.<\/strong><\/p>\n<ul>\n<li><strong>The first is<\/strong> <strong>covenants<\/strong>. Deteriorated equity or blown debt ratios usually breach the financial clauses of the contracts, which can trigger early maturity and reclassify long-term debt to current liabilities \u2014making the liquidity picture even worse\u2014.<\/li>\n<li>The second is the <strong>auditor&#8217;s opinion<\/strong> itself: a material uncertainty section or, worse, a qualification, sets off every alarm in the risk committee and makes credit more expensive or cuts it off.<\/li>\n<li>The third is the <strong>narrative<\/strong>: a bank clearly distinguishes between a company that acknowledges its situation, documents it and arrives with a plan, and one whose problems it has to uncover for itself. The difference between the two is, very often, the difference between refinancing and enforcing.<\/li>\n<\/ul>\n<p>That is why sequencing matters so much. Getting ahead of it, documenting the going concern assessment, negotiating covenants before breaching them and coming to the bank with an honest diagnosis and a plan \u2014ideally backed by an independent adviser\u2014 changes the conversation entirely. It is worth understanding in advance what the process of a <a href=\"https:\/\/maraz.es\/en\/restructuring-financing\/\">debt restructuring and refinancing<\/a> involves and coming to the table with the work done. Accounting is not a formality here: it is the calling card with which the company sits down to negotiate its survival.<\/p>\n<h2><strong>Accounting as a defence: directors&#8217; liability and the classification of the insolvency<\/strong><\/h2>\n<p><strong>The circle is closed by the classification of the insolvency. It is classified as fortuitous or culpable, and it is culpable when the generation or aggravation of the insolvency involved wilful misconduct or gross negligence by the directors (art. 442 TRLC)<\/strong>.<\/p>\n<p>Among the presumptions the law regards as <strong>irrebuttable<\/strong> (art. 443 TRLC) is one that connects directly with everything above: materially breaching the obligation to keep proper accounts, keeping double books or committing an irregularity relevant to understanding the financial position. And among those admitting evidence to the contrary (art. 444 TRLC): breaching the duty to file for insolvency in time and failing to prepare, audit or file the accounts. In such litigation, an <a href=\"https:\/\/maraz.es\/en\/financial-report-forensic\/\">economic-financial and forensic expert report<\/a> reconstructing the accounting reality is often decisive for either party&#8217;s position.<\/p>\n<p>The Supreme Court has clarified (STS 583\/2017) that an accounting irregularity is relevant, above all, when it <strong>conceals the existence of a cause for dissolution or a situation of insolvency<\/strong>. Read it carefully: manipulating or neglecting the accounts to paper over the crisis is precisely what the law punishes most harshly, and it can end with directors being ordered to cover the insolvency shortfall with their own assets, in addition to disqualification.<\/p>\n<p>You do not have to look far to see where that road leads: we have analysed it in the journey <a href=\"https:\/\/maraz.es\/en\/from-accounting-fraud-to-bankruptcy\/\">from accounting fraud to bankruptcy in the Pescanova, Gowex and Abengoa cases<\/a>. The practical conclusion is both blunt and encouraging: <strong>rigorous accounting, an honest and documented choice of accounting framework, and compliance with the deadlines are the best \u2014and sometimes the only\u2014 defence a director has.<\/strong><\/p>\n<h2><strong>A roadmap for the CFO and the board<\/strong><\/h2>\n<ul>\n<li><strong>Continuous monitoring.<\/strong> Track equity (both accounting and for company-law purposes) against 50% of capital every quarter, and liquidity with a 13-week cash-flow forecast. Watch covenants, maturities, customer concentration and the DSCR. Action threshold: equity approaching 50% of capital, or two or more warning indicators active.<\/li>\n<li><strong>On detecting warning signs (with going concern still sustainable).<\/strong> Document the assessment of the principle in writing, with a twelve-month horizon, assumptions and action plan. Disclose the uncertainty in the notes. Seek external advice and minute it. That dossier is your main future defence.<\/li>\n<li><strong>Faced with a cause for dissolution through losses.<\/strong> Call a general meeting within two months. Consider removing the cause (capital increase, participating loan, non-refundable contribution) or, as an alternative that exempts you from liability, notify the court of the start of negotiations on a restructuring plan.<\/li>\n<li><strong>Faced with imminent or probable insolvency.<\/strong> Consider pre-insolvency to protect the assets and buy time. If the operating business is viable and the problem is one of balance sheet, prioritise restructuring over insolvency.<\/li>\n<li><strong>Faced with current insolvency with no way out.<\/strong> File for insolvency within two months. Keep the going concern basis until liquidation opens. Be scrupulous with accounting: timely preparation, audit and filing are decisive to avoid a culpable classification.<\/li>\n<li><strong>On deciding to liquidate.<\/strong> Apply the ICAC Resolution of 2013: remeasure at the lower of carrying amount and liquidation value, stop depreciation, write off goodwill and deferred tax assets, and recognise the provisions for cessation.<\/li>\n<\/ul>\n<p><strong>And an exit that is often overlooked and is pure M&amp;A boutique territory: when the historic debtor is unviable but the business is not, the<\/strong> <a href=\"https:\/\/maraz.es\/en\/mergers-acquisitions\/\">sale of the business unit in a distressed context<\/a> \u2014including the insolvency pre-pack\u2014 <strong>allows the profitable activity and assets to be isolated from the liabilities of the past. The healthy business continues on a going concern basis in the hands of a buyer, while the company is wound up in an orderly manner. It is often the way to save value \u2014and jobs\u2014 when the company itself is beyond repair, and it fits squarely within the M&amp;A advisory work we provide at Maraz.<\/strong><\/p>\n<p>Anticipating the crisis and approaching the restructuring with technical, interdisciplinary rigour is, in the end, the variable that weighs most in turning a transitory financial stress into a second chance. The question we opened with \u2014are we still a going concern?\u2014 should not be answered by the balance sheet on your behalf when it is already too late. It should be answered by the board, in time, with the numbers in front of it and a plan on the table.<\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"color: #333399;\"><strong><a style=\"color: #333399;\" href=\"https:\/\/www.linkedin.com\/in\/javierderojas\/\" target=\"_blank\" rel=\"noopener\">Javier de Rojas Roca de Togores<\/a><\/strong><\/span><\/p>\n<p><span style=\"color: #333399;\"><strong>Partner \u2013 Maraz Corporate Finance<\/strong><\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><strong><em>FAQs on companies in crisis and the going concern principle<\/em><\/strong><\/h2>\n<h3><strong><em>Do losses or negative equity force the going concern principle to be abandoned?<\/em><\/strong><\/h3>\n<p><em>No. The principle is only abandoned when management decides to liquidate, cease trading or concludes there is no realistic alternative. A company with accumulated losses, negative equity or breached covenants can \u2014and must\u2014 keep preparing its accounts on a going concern basis if there is a realistic viability plan. What that situation does require is documenting the assessment and, if the doubt is significant, disclosing it as a material uncertainty in the notes.<\/em><\/p>\n<h3><strong><em>Is being in cause for dissolution through losses the same as being insolvent?<\/em><\/strong><\/h3>\n<p><em>No, they are two legally distinct concepts with two independent duties. The cause for dissolution through losses (art. 363.1.e LSC) is a balance-sheet and accounting test: it is triggered when equity falls below half the share capital, and requires a general meeting to be called within two months. Insolvency (art. 5 TRLC) is a liquidity test: it arises when the company cannot meet its due obligations on a regular basis, and requires an insolvency filing within two months. A company can be in one situation without being in the other, and both clocks can run at the same time.<\/em><\/p>\n<h3><strong><em>Does filing for insolvency mean applying the liquidation accounting framework?<\/em><\/strong><\/h3>\n<p><em>No. Once insolvency is declared, the going concern principle remains fully in force, because trading continues and the proceedings may end in an arrangement. Only the opening of the insolvency liquidation phase requires abandoning the principle and adopting the framework of the ICAC Resolution of 18 October 2013. During the insolvency, moreover, the obligation to prepare and audit the annual accounts continues.<\/em><\/p>\n<h3><strong><em>How does the transition to the liquidation framework affect equity?<\/em><\/strong><\/h3>\n<p><em>The impact is usually very severe. Assets move to being measured at the lower of carrying amount and liquidation value (often lower because it is a forced sale), fixed assets stop being depreciated, goodwill is written off in full and deferred tax assets are eliminated almost entirely, while liabilities are kept at amortised cost with no discount. The sum of these adjustments makes this transition the moment of greatest destruction of accounting value in a company&#8217;s life.<\/em><\/p>\n<h3><strong><em>If the arrangement includes a debt haircut, do you have to pay tax on that accounting income?<\/em><\/strong><\/h3>\n<p><em>The haircut generates accounting financial income, but its taxation is deferred by article 11.13 of the Corporate Income Tax Act: the income is included in the taxable base as the financial expenses of that same restructured debt are recognised, and up to the limit of that income. If the amount of the haircut exceeds those financial expenses, the excess is spread proportionally over the life of the payment plan. This neutrality rule prevents the company from having to pay tax on a debt saving that does not involve any actual cash inflow, precisely at the moment of greatest liquidity strain.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Companies in crisis and the going concern principle: there is one question almost no board asks in time, and yet it changes everything \u2014 are we still a going concern? It is not a philosophical question, nor a formality for the notes to the accounts. It is the line that separates a balance sheet worth [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":6476,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[334],"tags":[],"class_list":["post-6477","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-restructuring"],"acf":[],"_links":{"self":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/posts\/6477","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/comments?post=6477"}],"version-history":[{"count":0,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/posts\/6477\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/media\/6476"}],"wp:attachment":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/media?parent=6477"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/categories?post=6477"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/tags?post=6477"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}