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CA Intermediate · Advanced Accounting · AS 1 Disclosure of Accounting Policies

Meenakshi Pharma Ltd. is preparing its annual report. Management believes the going concern assumption is no longer appropriate as it intends to liquidate in the next year. Which statement is correct as per AS 1?

The company must not follow the going concern assumption, and AS 1 requires that the fact of non-compliance with a fundamental assumption be disclosed, together with the basis on which statements are prepared. Preparing on going concern basis with only a note would misrepresent asset values given the liquidation intention.

  1. AContinue on the going concern basis but add a note about the intended liquidation
  2. BPrepare the statements on the going concern basis, since AS 1 requires it in all cases
  3. CPrepare on a different basis, and disclose the basis used; the departure from the going concern assumption must be disclosedCorrect
  4. DDo not apply AS 1 because the company is in liquidation, and disclose nothing

Explanation

AS 1 states that if a fundamental accounting assumption is not followed, the fact should be disclosed. Going concern is presumed unless disclosed otherwise. Where liquidation is intended, the going concern assumption is not followed and the basis used must be disclosed. Continuing on going concern basis would misstate values.

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