ExpertMedium2 marksMultiple Choice
ACCA · Question 06 · Going Concern
Aviation Services Ltd has suffered severe financial difficulties due to a global travel downturn. The directors have decided to liquidate the company within the next three months. How should the financial statements for the current year be prepared?
Aviation Services Ltd has suffered severe financial difficulties due to a global travel downturn. The directors have decided to liquidate the company within the next three months. How should the financial statements for the current year be prepared?
Answer options:
A.
On a going concern basis, as the company is still legally trading at the year-end.
B.
On a break-up basis, with assets valued at their estimated net realizable value.
C.
On a going concern basis, but with a detailed note explaining the impending liquidation.
D.
Financial statements do not need to be prepared if the company is going into liquidation.
How to approach this question
Recall the accounting treatment when the going concern assumption is no longer appropriate.
Full Answer
B.On a break-up basis, with assets valued at their estimated net realizable value.✓ Correct
If management intends to liquidate the entity or cease trading, the going concern assumption is no longer appropriate. The financial statements must be prepared on a break-up basis, where assets are written down to their recoverable amounts (net realizable value) and long-term liabilities are reclassified as current.
Common mistakes
Believing that a disclosure note is enough to fix a broken going concern assumption while still using historical cost.
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