ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period
Kestrel Group has a 31 December 20X5 year end, with statements authorised on 28 March 20X6. Kestrel's subsidiary, Sparrow Ltd, ceased to be a going concern on 15 February 20X6 following a sudden loss of its only licence, caused by a regulatory change announced on 10 February 20X6. Sparrow's net assets of $5 million are in the consolidation. Which statement is correct?
Sparrow's information should be prepared on a break-up, non-going concern basis for consolidation. IAS 10 says deterioration after the reporting period that leaves no realistic alternative to ceasing trading requires a change of basis of preparation, not just disclosure. It is not excluded from consolidation at the year end.
- AConsolidate Sparrow's assets on a going concern basis and disclose the licence loss, since the regulatory change arose after the reporting period
- BPrepare Sparrow's financial information on a break-up basis for consolidation, because the going concern assumption is no longer appropriate at the authorisation dateCorrect
- CExclude Sparrow from consolidation at 31 December 20X5
- DAdjust only Sparrow's goodwill and keep other assets at carrying amount
Explanation
IAS 10 states that if after the reporting period management determines it intends to liquidate or cease trading, or has no realistic alternative, financial statements are not prepared on a going concern basis. This is a fundamental change, not just a non-adjusting event. Consequently Sparrow's figures must reflect a non-going concern basis, and consolidation continues until control is lost.
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