ExpertEasy2 marksMultiple Choice
ACCA · Question 06 · The Qualitative Characteristics of Financial Information
SkyLink Airways has suffered severe losses and its banking covenants have been breached. The bank has demanded immediate repayment of all loans, which SkyLink cannot afford. The directors intend to liquidate the company. How should the financial statements be prepared?
SkyLink Airways has suffered severe losses and its banking covenants have been breached. The bank has demanded immediate repayment of all loans, which SkyLink cannot afford. The directors intend to liquidate the company. How should the financial statements be prepared?
Answer options:
A.
On a going concern basis, as the liquidation has not yet occurred.
B.
On a break-up basis, with assets written down to their recoverable amounts and all liabilities classified as current.
C.
On a going concern basis, but with a detailed disclosure note about the bank loan.
D.
Financial statements do not need to be prepared if the company is liquidating.
How to approach this question
Assess the going concern assumption. If management intends to liquidate or has no realistic alternative but to do so, the going concern basis is invalid.
Full Answer
B.On a break-up basis, with assets written down to their recoverable amounts and all liabilities classified as current.✓ Correct
The going concern assumption assumes the entity will continue in operation for the foreseeable future. Since SkyLink intends to liquidate, this assumption is invalid. The financial statements must be prepared on a break-up basis, meaning assets are valued at their net realizable value and all long-term liabilities are reclassified as current.
Common mistakes
Believing that a disclosure note is enough to save the going concern basis when liquidation is imminent.
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