ACCA Applied Skills · Financial Reporting · The need for a conceptual framework and the characteristics of useful information
Kappa Co has a 31 December reporting date. On 15 February, before the financial statements were authorised for issue, its main factory was destroyed in a fire and its bankers withdrew all facilities, so Kappa has no realistic alternative but to cease trading. How should this be treated in the financial statements for the year ended 31 December?
Kappa must not use the going concern basis. IAS 10 says that where events after the reporting period show the entity cannot continue trading, a fundamental change of basis is needed, rather than treating the event as a simple non-adjusting disclosure.
- APrepare on a going concern basis and disclose the fire as a non-adjusting event
- BPrepare on a going concern basis but write the factory down to nil at 31 December
- CDo not prepare on a going concern basis, as a deterioration in position after the reporting period can require a change in basisCorrect
- DPrepare on a going concern basis and recognise a provision for closure costs at 31 December
Explanation
IAS 10 states that if a deterioration in operating results and financial position after the reporting period indicates the going concern assumption is no longer appropriate, a fundamental change in basis is required. This applies even though the fire occurred after the year end. Treating it merely as a non-adjusting event ignores this rule, and the factory and provision were not obligations or impairments at 31 December.
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