Quantitative Examples: Change from Going Concern to Liquidation Basis Under IAS 16

Introduction

Under IAS 16, the valuation of property, plant, and equipment (PPE) significantly differs when an entity transitions from a going concern to a liquidation basis. The useful life and the valuation method of these assets are adjusted to reflect their expected disposal rather than their continued use. This report provides three quantitative examples to illustrate how the useful life of assets changes when transitioning from a going concern to a liquidation basis.

Example 1: Manufacturing Equipment

Going Concern Basis

A manufacturing company has a piece of equipment used for production. Under the going concern assumption, the equipment has an estimated useful life of 10 years and is depreciated on a straight-line basis. The equipment’s original cost is R500,000, and it has been in use for 4 years. There is no residual value.

Calculation (Going Concern):

• Annual Depreciation Expense = Cost / Useful Life

• Annual Depreciation Expense = R500,000 / 10 = R50,000

• Accumulated Depreciation (4 years) = R50,000 * 4 = R200,000

• Net Book Value (Going Concern) = Cost - Accumulated Depreciation

• Net Book Value = R500,000 - R200,000 = R300,000

Liquidation Basis

When transitioning to a liquidation basis, the useful life changes to reflect the expected disposal of the equipment within one year. The equipment’s liquidation value (estimated fair value less costs to sell) is assessed to be R250,000.

Calculation (Liquidation Basis):

• Liquidation Value = R250,000

Summary

• Net Book Value (Going Concern): R300,000

• Liquidation Value: R250,000

Adjustment Needed: Write-down of R50,000 (R300,000 - R250,000) to reflect the asset’s liquidation value.

Example 2: Office Building

Going Concern Basis

A company owns an office building with a cost of R10,000,000 and an estimated useful life of 50 years. The building has been used for 20 years, and the company applies straight-line depreciation with no residual value.

Calculation (Going Concern):

• Annual Depreciation Expense = Cost / Useful Life

• Annual Depreciation Expense = R10,000,000 / 50 = R200,000

• Accumulated Depreciation (20 years) = R200,000 * 20 = R4,000,000

• Net Book Value (Going Concern) = Cost - Accumulated Depreciation

• Net Book Value = R10,000,000 - R4,000,000 = R6,000,000

Liquidation Basis

Under the liquidation basis, the office building is expected to be sold within one year, with an estimated liquidation value of R5,500,000 (fair value less costs to sell).

Calculation (Liquidation Basis):

• Liquidation Value = R5,500,000

Summary

• Net Book Value (Going Concern): R6,000,000

• Liquidation Value: R5,500,000

Adjustment Needed: Write-down of R500,000 (R6,000,000 - R5,500,000) to reflect the building’s liquidation value.

Example 3: Delivery Vehicles

Going Concern Basis

A logistics company has a fleet of delivery vehicles. Each vehicle was purchased for R200,000 and has an estimated useful life of 5 years. The vehicles have been in use for 3 years, and the company uses straight-line depreciation with no residual value.

Calculation (Going Concern):

• Annual Depreciation Expense = Cost / Useful Life

• Annual Depreciation Expense = R200,000 / 5 = R40,000

• Accumulated Depreciation (3 years) = R40,000 * 3 = R120,000

• Net Book Value per Vehicle (Going Concern) = Cost - Accumulated Depreciation

• Net Book Value per Vehicle = R200,000 - R120,000 = R80,000

Liquidation Basis

The liquidation value of each vehicle, considering fair value less costs to sell, is estimated to be R70,000.

Calculation (Liquidation Basis):

• Liquidation Value per Vehicle = R70,000

Summary

• Net Book Value per Vehicle (Going Concern): R80,000

• Liquidation Value per Vehicle: R70,000

Adjustment Needed: Write-down of R10,000 per vehicle (R80,000 - R70,000) to reflect the vehicles’ liquidation value.

Conclusion

The transition from a going concern basis to a liquidation basis under IAS 16 significantly impacts the valuation of property, plant, and equipment. The examples provided demonstrate how useful lives are shortened to reflect expected disposal periods, and asset values are adjusted to their estimated liquidation proceeds. These adjustments ensure that financial statements provide a true and fair view of an entity’s financial position during liquidation, complying with the principles of IAS 16.

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