Section A

A retail chain has suffered massive losses and the directors have decided to liquidate the company shortly after the year-end.

How should the financial statements for the year-end be prepared?

Answer options:

On a going concern basis, as the decision was made after year-end.

On a break-up basis, with assets valued at net realizable value.

On a going concern basis, but with a note disclosing the impending liquidation.

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 the entity, the going concern basis is not appropriate. The break-up basis must be used.

Full Answer

B.On a break-up basis, with assets valued at net realizable value.✓ Correct

Under IAS 1, if management intends to liquidate the entity or cease trading, the financial statements must not be prepared on a going concern basis. Instead, they are prepared on an alternative basis (often called the break-up basis), where assets are written down to their net realizable values and liabilities are reclassified as current.

Common mistakes

Thinking that a disclosure note is sufficient while keeping the going concern basis.

Question 19 All questions Question 21

Practice the full ACCA FA — Financial Accounting Practice Exam 5

65 questions · hints · full answers · grading

More questions from this exam

Q01Section A Quantum Innovations, a rapidly growing tech startup, is preparing its first set of for...Easy Q02Section A MetroWater, a public utility company, is finalizing its annual report. The chief accou...Medium Q03Section A GlobalHealth NGO receives a restricted cash grant of $50,000 specifically designated f...Medium Q04Section A CircuitWorks manufactures specialized electronic components. At year-end, they have 1,...Medium Q05Section A CodeCrafters Ltd is developing a new proprietary software platform. During the year, t...Easy

View all 65 questions →