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ACCA Applied Skills · Financial Reporting · The need for a conceptual framework and the characteristics of useful information

Zeta Co's directors have decided to cease trading in six months and sell all assets. Which statement about preparing Zeta's financial statements for the current year is correct under IAS 1?

Zeta must not use the going concern basis because management intends to cease trading. IAS 1 requires an alternative basis, such as break-up values, and disclosure of that basis and the reason the entity is not regarded as a going concern.

  1. AThey must be prepared on the going concern basis with a note on the plans
  2. BThey must not be prepared on a going concern basis, and the basis actually used must be disclosedCorrect
  3. CThey may be prepared on a going concern basis provided assets are shown at historical cost
  4. DThey must be prepared on a going concern basis because the entity has not yet ceased trading

Explanation

IAS 1 says financial statements must not be prepared on a going concern basis if management intends to liquidate the entity or cease trading, or has no realistic alternative. The basis actually used and the reason the entity is not regarded as a going concern must be disclosed. The option saying going concern must still be used ignores this requirement.

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