Financial Reporting · The need for a conceptual framework and the characteristics of useful information

Going Concern and Other Underlying Assumptions in ACCA Financial Reporting

Updated 11 October 2026 · Fact-checked

Going concern is the assumption that an entity will keep operating for the foreseeable future, so financial statements are prepared on that basis. The accruals basis records transactions when they occur, not when cash moves. If going concern fails, you use another basis, such as break-up values, and disclose it.

Understand Going Concern and Other Underlying Assumptions

Financial statements must be prepared on a set of basic assumptions. The IFRS Conceptual Framework identifies going concern as the underlying assumption. It does not treat accruals as a second underlying assumption. Instead, IAS 1 requires an entity to use the accruals basis of accounting, except for cash flow information. The Framework discusses accrual accounting as the way to give a useful picture of performance.

Going concern means the entity is assumed to continue in operation for the foreseeable future. It has neither the intention nor the need to liquidate or cut back its operations significantly. This is why assets are not shown at the amount they would fetch in a forced sale. A machine is carried at cost less depreciation because the business will use it, not sell it tomorrow.

If management intends to liquidate or stop trading, or has no realistic alternative, the assumption is not appropriate. The statements must then be prepared on a different basis, for example break-up (realisable) values. Assets are written down to what they will realise, extra liabilities such as redundancy or contract termination costs may arise, and long-term items may become current. The entity must disclose that it has not used the going concern basis and say what basis it used.

Under IAS 1, management assesses going concern, looking at least 12 months from the end of the reporting period. If it is aware of material uncertainties that cast significant doubt on the ability to continue, it must disclose them. The statements are still prepared on a going concern basis in that case.

The accruals basis means you recognise the effects of transactions when they occur, not when cash is received or paid. Revenue is matched with the expenses that earned it. Cash basis would record only cash flows, so it would ignore receivables, payables, prepayments and depreciation. Accruals gives a better picture of performance and position, which supports the qualitative characteristics of useful information.

Key rules to remember

Going concern assumption: Entity continues in operation for the foreseeable future, with no intention or need to liquidate or curtail operations materially; If not appropriate, prepare on another basis (e.g. break-up) and disclose that basis and why.
Going concern assessment period: Look at least 12 months from the end of the reporting period; IAS 1 says at least, not exactly. Material uncertainties must be disclosed.
Accruals basis: Profit = revenue earned in the period − expenses incurred in the period; Regardless of when cash moves. IAS 1 applies it to all statements except cash flow information.
Accrual adjustment: Expense charged = cash paid + accrued at end − prepaid at end (adjusting for opening balances where relevant); Use it to move from cash paid to the expense for the period.

How to solve Going Concern and Other Underlying Assumptions questions

Use this method for any question on going concern or accruals, whether it is a multiple-choice question or a written explanation.

1Identify which concept the question tests: going concern, accruals, or both.
2For going concern, look for signals: loss of a major customer, inability to pay debts, breached loan terms, intention to close, or loss of key licences.
3Decide whether the assumption is still appropriate, or only uncertain. Intention or need to liquidate means not appropriate. Doubt only means disclose a material uncertainty.
4If not appropriate, state the effect: use break-up or realisable values, recognise extra liabilities, review classification, and disclose the basis used.
5For accruals, match income and expenses to the period they relate to, not the cash date.
6Work out the adjustment: add accrued costs, deduct prepayments, recognise receivables and payables.
7Check the answer against the wording asked: explain, calculate, or identify the correct statement.
8For written answers, finish with the impact on the financial statements and on users.

Quickest way: Two-question test

When to use it: Use it for Section A and OT case questions where you have about three minutes per question.

Ask: does the entity intend or need to stop trading? If yes, going concern is not appropriate.
If there is only doubt, the answer is a material uncertainty disclosure and normal basis.
Ask: is the item about cash timing or about when the economic event happened? Accruals follows the event.
Eliminate options that say cash basis suits a normal profit or loss statement, or that going concern means the business will never fail.

Common mistakes in Going Concern and Other Underlying Assumptions

Saying going concern means the entity is guaranteed to survive.
The name sounds like a promise about the future.
Fix: It is an assumption made by management for preparation purposes. It can be wrong, and the notes must flag significant doubt.
Writing that doubt about going concern means statements must use break-up values.
Students merge uncertainty and inappropriateness.
Fix: Material uncertainty means normal basis plus disclosure. Break-up basis applies only when the assumption is not appropriate.
Forgetting to disclose the basis used when going concern fails.
Students focus on the numbers and skip the narrative.
Fix: Always state that statements are not on a going concern basis, the basis used and the reason.
Treating accruals as the same as prudence or matching only.
Terms are taught close together.
Fix: Accruals is about recognising transactions when they occur. Matching is the effect of applying it.
Applying accruals to the statement of cash flows.
Students assume accruals covers every statement.
Fix: IAS 1 excludes cash flow information. That statement reports cash movements.
Keeping non-current assets at depreciated cost after a decision to liquidate.
Students run the usual routine without checking the basis.
Fix: Under break-up basis assets are measured at expected realisable amounts, so write down where lower.

Worked examples

Example 1

Pagoda Ltd paid a year's rent of $12,000 in advance on 1 October. Its year end is 31 December. It also received an electricity bill of $900 for October to December, which it will pay in January. Under the accruals basis, what is the total expense for rent and electricity in the year to 31 December?

Show the solution

Rent covers 12 months from 1 October. Only 3 months fall in the year to 31 December.
Rent expense = $12,000 × 3 ÷ 12 = $3,000.
The remaining $9,000 is a prepayment, shown as a current asset.
Electricity relates to October to December, so $900 is an expense of the year even though unpaid.
The $900 is an accrued liability at the year end.
Total expense = $3,000 + $900 = $3,900. On a cash basis the expense would be $12,000, which misstates profit.

Answer: The total expense is $3,900, with a $9,000 prepayment and a $900 accrual at the year end.

Example 2

Delta Co's main customer, which gives 80% of its sales, has gone into liquidation. After the year end, but before the financial statements are authorised for issue, the directors decide to cease trading and sell the assets. The inventory cost $40,000 and is expected to sell for $25,000 net. Explain the impact on the year-end financial statements.

Show the solution

The directors have decided to cease trading, so the going concern assumption is not appropriate.
The customer's liquidation is a warning signal. The decision to cease trading is what removes the going concern basis. Under IAS 10, a decision to liquidate or cease trading made after the reporting period requires a change of basis, even though it happens after the year end. The year-end statements are therefore not prepared on a going concern basis.
They are prepared on another basis, such as break-up (realisable) values.
Because the break-up basis applies, inventory is written down from cost of $40,000 to the expected realisable amount of $25,000. This is a write-down of $15,000 in the year-end statements.
Non-current assets are also reviewed and written down to expected sale proceeds.
Recognise additional liabilities, for example redundancy and contract termination costs, when obligations exist.
Reclassify items as needed, since long-term liabilities may become payable soon.
Disclose that the going concern basis was not used, the basis adopted and the reasons.

Answer: Going concern is inappropriate. Under IAS 10 the year-end statements are prepared on a break-up basis. Because that basis applies, write inventory down by $15,000 to its expected realisable amount of $25,000, recognise extra liabilities and disclose the basis used.

Exam tips

In Section A, look for the words intention or need to liquidate. They signal that going concern is not appropriate.
Keep the two outcomes separate in written answers: not appropriate means different basis; significant doubt means disclose a material uncertainty.
For accruals, draw a quick timeline to see how many months fall in the period before calculating.
Link your answer to users: accruals and going concern help the statements give a useful, faithful picture.
Always finish a going concern answer with disclosure, as examiners reward it.

Practice questions from The need for a conceptual framework and the characteristics of useful information

Going Concern and Other Underlying Assumptions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Going Concern and Other Underlying Assumptions: frequently asked questions

What is the going concern assumption in the Conceptual Framework?

It is the assumption that the entity will continue in operation for the foreseeable future. Statements are prepared on that basis unless management intends or needs to liquidate or stop trading. If the assumption does not hold, a different basis is used and disclosed.

What happens if the going concern assumption is not appropriate?

You prepare the statements on another basis, such as break-up values. Assets are written down to what they will realise, further liabilities may arise and classification is reviewed. The entity must disclose the basis used and why.

What is the difference between accruals basis and cash basis accounting?

Accruals records income and expenses when they are earned or incurred, regardless of cash timing. Cash basis records only when cash is received or paid. Accruals gives a better view of performance, because it includes receivables, payables, prepayments and depreciation.

Is going concern the same as the accruals basis?

No. Going concern is about whether the entity will continue operating, and it affects how assets and liabilities are measured. Accruals is about when you recognise transactions. Both support useful financial statements.