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ACCA Applied Knowledge · Financial Accounting · Duties and responsibilities of those charged with governance

When preparing financial statements, the directors assess whether the company can continue operating for the foreseeable future. Which accounting concept does this assessment relate to, and what is the consequence if the company is NOT a going concern?

The assessment relates to the going concern basis. If the company is not a going concern, the statements can no longer be prepared on the normal continuing basis, so assets and liabilities, for example assets at cost less depreciation, must be remeasured on a different basis.

  1. AAccruals; income is recognised only when cash is received
  2. BGoing concern; assets and liabilities are no longer reported on the normal continuing basis, such as at cost less depreciationCorrect
  3. CPrudence; all liabilities are measured at their highest possible value
  4. DMateriality; the financial statements need not be prepared

Explanation

Directors assess going concern when preparing the statements. If the entity is not a going concern, the statements cannot be prepared on the usual continuing basis, so assets may need to be measured at realisable values and liabilities reassessed. The other options misstate the concepts named.

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