Skip to content

CMA Intermediate · Financial Accounting · Disclosure of Accounting Policies (AS 1)

Mehta Industries is preparing its statements for the year. Its management intends to curtail materially the scale of operations next year because of losses, but has not decided on liquidation. Which statement is correct as per AS 1?

The going concern assumption presumes no intention or necessity of liquidation or of materially curtailing operations. Since management intends a material curtailment, the assumption is not followed, and AS 1 requires that fact to be disclosed in the financial statements.

  1. AGoing concern is still assumed, since liquidation has not been decided, and no disclosure is needed
  2. BGoing concern assumes no intention or necessity of curtailing materially the scale of operations, so if the assumption is not followed the fact should be disclosedCorrect
  3. CThe going concern assumption concerns only liquidation, so material curtailment is irrelevant
  4. DDisclosure of the departure from going concern is optional if the auditor agrees

Explanation

AS 1 describes going concern as the assumption that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operations. A material curtailment intention therefore means the assumption is not followed, and the fact must be disclosed. Option A ignores the curtailment limb.

Did you get it right without looking?

One question tells you little. A timed set on Disclosure of Accounting Policies (AS 1) shows your real accuracy, how long you take and where you lose marks.

Practise Disclosure of Accounting Policies (AS 1)Free diagnostic mock

More Disclosure of Accounting Policies (AS 1) questions