Going Concern — ACCA Practice Question 06

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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.

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?

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Practice the full ACCA FA — Financial Accounting Practice Exam 3

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