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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Himalaya Steels Ltd. prepares its financial statements on the assumption that it will continue in operation for the foreseeable future, with no intention or need to liquidate or materially curtail its operations. A machine costing ₹12,00,000 is therefore depreciated over its useful life instead of being shown at its forced-sale value. Which underlying assumption in the Framework does this reflect?

This reflects the going concern assumption. The enterprise is presumed to continue in operation for the foreseeable future without liquidating or materially curtailing its operations, so assets are depreciated over useful life instead of being valued at forced-sale amounts.

  1. AAccrual basis
  2. BGoing concernCorrect
  3. CMateriality
  4. DSubstance over form

Explanation

The Framework identifies going concern as the assumption that the enterprise will continue in operation for the foreseeable future. Because of this, assets are shown at cost less depreciation and not at liquidation values. Accrual relates to recognising items when they occur, not when cash moves.

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