Difference Between IAS 1 Under Going Concern and IAS 1 Under Liquidation

Introduction

IAS 1, “Presentation of Financial Statements,” sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content, and the underlying principles. This report explores the key differences in applying IAS 1 under a going concern assumption and during liquidation.

IAS 1 Under Going Concern

Core Principle

Under IAS 1, the core principle is that financial statements should provide a fair presentation of an entity’s financial position, financial performance, and cash flows. This includes:

• Going concern assumption.

• Accrual basis of accounting.

• Consistency of presentation.

• Materiality and aggregation.

• Offsetting.

• Frequency of reporting.

• Comparative information.

Going Concern Assumption

Financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. This means the entity is expected to continue its operations for the foreseeable future.

Example: A manufacturing company prepares its financial statements assuming it will continue operations and generate profits over the next 12 months and beyond.

Presentation of Financial Statements

Financial statements must include:

• A statement of financial position.

• A statement of profit or loss and other comprehensive income.

• A statement of changes in equity.

• A statement of cash flows.

• Notes, including a summary of significant accounting policies and other explanatory information.

Example: A retail company presents a comprehensive set of financial statements, including detailed notes on its accounting policies and significant transactions.

Accrual Basis of Accounting

Except for the cash flow statement, financial statements are prepared using the accrual basis of accounting, where transactions and events are recognized when they occur (not when cash is received or paid).

Example: A service company recognizes revenue when services are rendered, not when payment is received.

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements. Items of a dissimilar nature or function are presented separately unless they are immaterial.

Example: A company separately presents its trade receivables and other receivables due to their different nature and function.

Offsetting

Assets and liabilities, and income and expenses, are not offset unless required or permitted by an IFRS.

Example: A company reports its trade receivables and trade payables separately without netting them off against each other.

Frequency of Reporting

Financial statements are presented at least annually. When the end of an entity’s reporting period changes, and financial statements are presented for a period other than a year, the entity discloses the reason for the change and the fact that comparative amounts for the statement of profit or loss and other comprehensive income, changes in equity, and cash flows are not entirely comparable.

Example: A company changes its financial year-end from December 31 to March 31 and discloses this change along with the comparability issues.

Comparative Information

Comparative information must be disclosed in respect of the previous period for all amounts reported in the financial statements. Comparative information should be included for narrative and descriptive information if it is relevant to understanding the current period’s financial statements.

Example: A company includes comparative figures for the prior year in its financial statements to provide context for the current year’s results.

IAS 1 Under Liquidation

Core Principle

During liquidation, the focus shifts from the going concern assumption to the realization of assets and settlement of liabilities. The presentation and disclosure requirements of IAS 1 must be adjusted to reflect the entity’s liquidation status.

Going Concern Assumption

The going concern assumption is no longer appropriate. Financial statements must be prepared on a liquidation basis, reflecting the imminent cessation of operations and the need to realize assets and settle liabilities.

Example: A company in liquidation prepares its financial statements based on the assumption that it will cease operations and sell off its assets within the next few months.

Presentation of Financial Statements

Financial statements should be adjusted to reflect the liquidation basis of accounting. This includes:

• A statement of net assets in liquidation.

• A statement of changes in net assets in liquidation.

• Notes explaining the basis of preparation and any significant changes due to liquidation.

Example: A company in liquidation presents a statement showing the expected proceeds from asset sales and the estimated settlement amounts for liabilities.

Accrual Basis of Accounting

While the accrual basis of accounting is still used, the focus shifts to recognizing expenses and liabilities related to the liquidation process and the immediate realization of assets.

Example: A company in liquidation accrues expenses related to legal fees, severance payments, and other costs associated with winding down operations.

Materiality and Aggregation

Materiality and aggregation principles remain, but the presentation focuses on the liquidation process. Similar items are grouped to provide a clear picture of the liquidation status.

Example: A company in liquidation groups together all liabilities related to severance payments and outstanding legal fees under a single heading.

Offsetting

Offsetting principles still apply, but the presentation may reflect net realizable values of assets and liabilities to provide a clear picture of the expected outcomes from the liquidation.

Example: A company in liquidation reports trade receivables net of expected credit losses to reflect the amount it expects to collect during liquidation.

Frequency of Reporting

The frequency of reporting may increase to provide stakeholders with timely information about the progress of the liquidation. Periodic updates might be necessary to reflect changes in asset realizations and liability settlements.

Example: A company in liquidation provides quarterly updates to its financial statements to reflect ongoing asset sales and liability settlements.

Comparative Information

Comparative information should be adjusted to reflect the liquidation basis. This includes restating prior period figures to provide meaningful comparisons under the new basis of accounting.

Example: A company in liquidation restates its prior period financial statements to reflect the values under the liquidation basis, providing context for the current period’s figures.

Conclusion

The application of IAS 1 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on providing a fair presentation of the entity’s financial position, performance, and cash flows based on the assumption of continued operations. In contrast, during liquidation, the emphasis shifts to reflecting the immediate realization of assets and settlement of liabilities, with adjustments to the presentation and disclosure requirements to provide transparency about the liquidation process. Entities must carefully reassess their financial statement presentation and make necessary adjustments to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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