Fortbestehensprognose

What Is Fortbestehensprognose?

Fortbestehensprognose, often translated as "going concern prognosis" or "continuation forecast," is a critical financial assessment under German law. It is a forward-looking analysis conducted by a company's management to determine its ability to remain a viable entity and fulfill its financial obligations for a specified future period. This assessment is fundamental within the broader field of Corporate Finance, as it directly impacts accounting practices, auditing procedures, and, most critically, the obligation to file for insolvency. A positive Fortbestehensprognose indicates that the company is expected to meet its liabilities as they fall due, thereby confirming its solvency. Conversely, a negative Fortbestehensprognose signals that a company's continued existence is unlikely, triggering immediate and severe legal consequences, including a potential obligation for management to initiate liquidation proceedings.

History and Origin

The concept of Fortbestehensprognose is deeply rooted in German commercial and insolvency law, designed to provide early warnings about potential financial distress and protect creditors. Its legal basis is primarily found in the German Insolvency Code (Insolvenzordnung – InsO), specifically Section 19, which defines over-indebtedness. According to this section, over-indebtedness exists if a debtor's assets no longer cover its existing liabilities, "unless it is highly likely, considering the circumstances, that the enterprise will continue to exist for the next 12 months". ⁷This "highly likely" continuation refers directly to a positive Fortbestehensprognose.

The requirement for such a prognosis gained significant importance with the continuous evolution of German insolvency law, particularly in response to economic challenges and the need for robust corporate governance. Legislative changes, such as the German Restructuring and Insolvency Law Crisis Consequence Mitigation Act (SanInsKG), have at times adjusted the forecast periods to account for prevailing economic conditions, highlighting the dynamic nature and critical role of this assessment in maintaining financial stability.

⁶## Key Takeaways

• Legal Mandate: Fortbestehensprognose is a legally mandated assessment in Germany, primarily under the Insolvency Code.
• Purpose: It evaluates a company's ability to continue as a going concern and meet its financial obligations over a specific forecast period.
• Insolvency Trigger: A negative Fortbestehensprognose can be a direct trigger for an insolvency filing due to over-indebtedness.
• Management Responsibility: Company management is responsible for preparing and continuously monitoring the Fortbestehensprognose.
• External Scrutiny: Auditors and other stakeholders rigorously assess the underlying assumptions and calculations of the prognosis.

Formula and Calculation

The Fortbestehensprognose does not rely on a single, universal formula but rather on a comprehensive financial planning process that includes detailed revenue, expense, and cash flow projections. The core principle involves demonstrating that planned cash inflows are overwhelmingly likely to cover planned cash outflows over the forecast period.

A key component is the preparation of a robust cash flow forecast and integrated financial planning. This planning typically encompasses:

• Revenue Planning: Detailed projections of sales and other income.
• Cost Planning: Projections of operating expenses, personnel costs, and other outflows.
• Investment Planning: Anticipated capital expenditures.
• Financing Planning: Consideration of existing and new debt financing, equity injections, and other funding sources.

The assessment hinges on proving with "overwhelming probability" (überwiegende Wahrscheinlichkeit) that the company will remain solvent. This requires meticulous financial planning and often involves sensitivity analyses to test the robustness of the prognosis under various scenarios.

Interpreting the Fortbestehensprognose

Interpreting the Fortbestehensprognose is crucial for management, auditors, and creditors. A "positive" Fortbestehensprognose means that, based on a realistic earnings and liquidity plan, the company is overwhelmingly likely to be able to meet its liabilities as they fall due within the next 12 months, thereby remaining solvent. If⁵ such a positive prognosis can be made, the company is generally considered a "going concern," and its financial statements can be prepared using going concern principles, where assets and liabilities are valued at their continuation values.

Conversely, a "negative" Fortbestehensprognose indicates that the company's ability to continue operations is doubtful. This immediately triggers the second step of the German over-indebtedness test: a comparison of the company's assets valued at liquidation prices against its liabilities. If, after this step, the company is found to be over-indebted, it is legally obliged to file for insolvency. This shift in perspective from continuation values to liquidation values for balance sheet items fundamentally alters the company's financial reporting and highlights the severe implications of a negative assessment.

Hypothetical Example

Consider "Alpha GmbH," a mid-sized manufacturing company. Due to a sudden downturn in its key market, Alpha GmbH experiences significant revenue declines and mounting operational losses. Its management, anticipating potential financial difficulties, must prepare a Fortbestehensprognose.

1. Initial Assessment: Alpha GmbH's current balance sheet shows negative equity, indicating a theoretical over-indebtedness. This triggers the need for a formal Fortbestehensprognose.
2. Prognosis Preparation: The management team, working with financial advisors, develops a detailed 12-month integrated plan. This plan includes:
   • Cost-cutting measures: Implementing immediate reductions in administrative expenses and temporarily pausing non-essential investments.
   • Revenue generation initiatives: Accelerating sales efforts for new product lines and negotiating deferred payment terms with key customers.
   • Financing options: Exploring a short-term bridging loan from its bank and discussing potential capital injections from shareholders.
3. Outcome:
   • Scenario A (Positive Fortbestehensprognose): If the detailed plan, including the proposed restructuring and financing measures, demonstrates with "overwhelming probability" that Alpha GmbH will be able to meet all its payment obligations over the next 12 months, the Fortbestehensprognose is positive. The company avoids an immediate insolvency filing based on over-indebtedness.
   • Scenario B (Negative Fortbestehensprognose): If, even with optimistic but realistic assumptions, the plan shows that Alpha GmbH is highly unlikely to meet its obligations, or if critical financing cannot be secured, the Fortbestehensprognose is negative. This would then require a further examination of the company's liquidation values, potentially leading to an insolvency filing.

Practical Applications

Fortbestehensprognose plays a crucial role in several practical areas within German corporate and financial landscapes:

• Insolvency Prevention and Management: It is a primary tool for detecting and addressing financial crises at an early stage. Management is legally obligated to assess the company's financial health, and a timely Fortbestehensprognose can help identify the need for restructuring measures before an irreversible crisis sets in. If a positive prognosis cannot be achieved, it triggers the obligation to file for insolvency, thereby protecting creditors.
• ⁴ Auditing and Financial Reporting: Auditors scrutinize the Fortbestehensprognose during their examination of a company's financial statements. Their assessment impacts the auditor's opinion on whether the financial statements are prepared under the assumption of a going concern. Concerns about a company's ability to continue as a going concern are explicitly highlighted in auditor reports, providing crucial information to investors and other stakeholders. The number of such "going concern" warnings issued by auditors can fluctuate significantly based on economic conditions and specific industry challenges.
• ³ Lender and Investor Relations: Banks and other lenders often require a positive Fortbestehensprognose as a condition for granting or extending debt financing or for agreeing to restructuring plans. Investors also rely on this assessment as part of their due diligence to evaluate the long-term viability and risk management of a company.
• Corporate Governance: The process of preparing and continuously updating the Fortbestehensprognose underscores the management's responsibility for the company's solvency and long-term viability. Failure to adequately perform this duty can lead to significant personal liability for managing directors under German law.

Limitations and Criticisms

While essential, the Fortbestehensprognose also has limitations and faces certain criticisms:

• Forecasting Uncertainty: The prognosis is inherently forward-looking and relies on a multitude of assumptions about future economic conditions, market developments, and internal operational effectiveness. Unforeseen events, such as a sudden economic downturn or a major supply chain disruption, can quickly invalidate a previously positive prognosis. Critics argue that even with diligent effort, perfect foresight is impossible, making the "overwhelming probability" standard challenging to consistently meet in volatile environments.
• Management Bias: As the management prepares the Fortbestehensprognose, there can be an inherent bias towards presenting a positive outlook to avoid the severe consequences of an insolvency filing. This necessitates rigorous scrutiny by auditors and external experts to ensure objectivity and realism in the underlying assumptions and projections.
• Legal Complexity: The interplay between the German Insolvency Code, the German Commercial Code (Handelsgesetzbuch – HGB), and various auditing standards (such as IDW PS 270) makes the application of Fortbestehensprognose complex. Lega²l interpretations and temporary adjustments to forecast periods, sometimes in response to crises, further add to this complexity for businesses operating in Germany.
• ¹"Window Dressing" Concerns: In some cases, companies might engage in "window dressing" or short-term measures to artificially improve the appearance of their immediate financial health to secure a positive Fortbestehensprognose, potentially delaying necessary, more fundamental restructuring.

Fortbestehensprognose vs. Fortführungsprognose

The terms Fortbestehensprognose and Fortführungsprognose are often used interchangeably or confused, but they serve distinct purposes within German law, though both relate to a company's ability to continue operations.

In essence, the Fortbestehensprognose is an insolvency-law concept focused on actual or imminent illiquidity and over-indebtedness, with serious legal consequences for management. The Fortführungsprognose, on the other hand, is an accounting concept determining the appropriate valuation principles for a company's financial statements, regardless of whether it implies an insolvency obligation. However, a negative Fortbestehensprognose will almost always lead to a negative Fortführungsprognose.

FAQs

What happens if a company fails to provide a positive Fortbestehensprognose?

If a company cannot provide a positive Fortbestehensprognose, it triggers a deeper assessment of its financial health to determine if an over-indebtedness exists. If confirmed, the managing directors are legally obliged to file for insolvency without undue delay, typically within three weeks of gaining knowledge of the insolvency ground. Failure to do so can result in personal liability for the management.

How often must a Fortbestehensprognose be prepared?

There is no fixed schedule for preparing a Fortbestehensprognose, but it must be prepared whenever there are indications that a company might be over-indebted or illiquid. This requires continuous monitoring of the company's cash flow and overall financial situation by its management. In practice, this often means regular reviews, especially in times of economic uncertainty.

Who typically prepares and reviews the Fortbestehensprognose?

The company's managing directors are responsible for preparing the Fortbestehensprognose. This often involves the company's finance department, internal accountants, and potentially external financial advisors or sanierungsberater (restructuring advisors). For public companies or those subject to statutory audit, external auditors will review the prognosis as part of their audit of the financial statements, examining its methodology and underlying assumptions.

Is Fortbestehensprognose unique to Germany?

While the term and its specific legal framework are unique to Germany, the underlying concept of assessing a company's ability to continue as a "going concern" is a fundamental principle in accounting and auditing worldwide. Most accounting standards (e.g., IFRS, GAAP) and auditing standards require management to assess going concern and auditors to evaluate that assessment. However, the explicit link to insolvency triggers and personal liability for management is particularly pronounced under German law.