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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

Kestrel Co's financial statements are prepared on a going concern basis. Shortly after the year end, the directors decide to cease trading and liquidate the company within three months, with no realistic alternative. According to IFRS, what is the correct effect on the financial statements?

The financial statements must be prepared on a basis other than going concern, such as break-up, and that basis must be disclosed. Management's decision to liquidate with no realistic alternative means the going concern assumption is no longer appropriate.

  1. AStatements continue on a going concern basis, with a note of the decision
  2. BStatements are prepared on a basis other than going concern, with disclosure of that basisCorrect
  3. CNon-current assets are revalued to market value but the going concern basis remains
  4. DStatements are not prepared because the company will cease to exist

Explanation

If management intends to liquidate or cease trading and has no realistic alternative, the going concern assumption is no longer appropriate. Statements must then be prepared on another basis (such as break-up) and that fact and basis disclosed. Continuing on going concern with only a note would be misleading.

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