6. Going-concern
A bank shall not prepare its financial statements on a going-concern
basis, if management determines after the balance sheet date either that
it intends to liquidate the undertaking, or to cease trading, or that it has no
realistic alternative but to do so.
EXAMPLE
Your bank is
preparing its financial statements for the period to 31st December
2XX4.
On January 4th
2XX5, your directors decide to sell the bank’s assets and liquidate the bank.
The financial statements to 31st
December 2XX4 should be produced on a liquidation basis, not a going-concern
basis.
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EXAMPLE
Management
shall not prepare the bank’s financial statements on a going concern basis if
it determines after the balance sheet date to liquidate the bank or to cease doing
business.
Should
management adjust the bank’s financial statements because the shareholders
decided after the balance sheet date to cease the bank’s core operations?
Background
Management
announced on 5 February 2XX3 its intention to cease the bank’s core
operations. The financial statements were authorised for issue on 19 February
2XX3.
Solution
Management
shall prepare the bank’s financial statements on a liquidation basis rather
than on a going concern basis.
Management
shall make an assessment of the bank’s ability to continue as a going concern
when preparing the financial statements. Although the decision to cease the
bank’s core operations was made and announced after the balance sheet date,
the financial statements shall be prepared on a basis other than going
concern.
Consequently,
the amounts recognised in the bank’s financial statements for 31 December
2XX2 shall be adjusted to conform to the liquidation basis of accounting.
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Deterioration in operating results and financial position, after the balance
sheet date, may indicate a need to consider whether the going concern
assumption is still appropriate.
If the going-concern assumption is no longer appropriate, IAS 10 requires
a fundamental change in the basis of accounting, rather than an adjustment to
the amounts recorded within the original basis of accounting.
EXAMPLE
Your bank has a client that owes you $45 million on 31st
December 2XX4.
On January 19th
2XX5, your client goes into liquidation. You are informed that you will
receive nothing from the liquidation.
Your bank is unable to raise funds to recover from
this loss, and is certain to be liquidated.
The financial statements to 31st
December 2XX4 should be produced on a liquidation basis, not a going-concern
basis.
IAS 1 specifies required disclosures if:
(i) the financial statements are not prepared on a going-concern basis;
or
(ii) management is aware of material uncertainties related to events, or
conditions, that may cast significant doubt upon the undertaking’s ability to
continue as a going-concern.
The events, or conditions, requiring disclosure may arise after the
balance sheet date.
EXAMPLE
Your bank has a client that owes you $85 million on 31st
December 2XX4.
On January 13th 2XX5, your client goes into
liquidation. You are informed that you will receive nothing from the
liquidation.
Your bank may be able to raise funds to recover from
this disaster, but is unable to secure any commitment by the date that the
financial statements are to be approved.
The financial statements to 31st
December 2XX4 should be produced on a liquidation basis, not a going-concern
basis, due to the uncertainty.
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