DipIFRS ACCA course - IAS1 Presentation of Financial Statements No.14

DipIFRS ACCA course - IAS1 Presentation of Financial Statements No.14


Going concern:

The conceptual framework states that financial statements are usually prepared on the assumption that the entity is going to continue and will continue to operate in the foreseeable future.

IAS 1 requires management to make an assessment of the entity's ability to continue as a going concern.

If management has significant concerns about the entity’s ability to continue as a going concern, then the uncertainties must be disclosed. If management concludes that the enterprise is not a going concern then the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.

Since readers of financial statements will use these financial statements to make economic decisions related to the future, the important principle here is the continuity of the company, "and from here the importance of the principle of continuity appears."

Some of the indications of possible discontinuity are:
1. Inability to meet debts when due.
2. Difficulty accessing cash, making it difficult for companies to manage their operating cycles.
3. Unplanned sales of non-current assets, as this indicates the inability to generate cash from other assets (Specifically the current assets) .. and since non-current assets generate income .. it will cause a decrease in income and thus profits.
4. Failure to pay employees' salaries ... as this may indicate a significant shortage of working capital.
5. Inability to obtain credit from suppliers .. This indicates an inability to pay suppliers on time and problems with working capital.
6. Major technological changes .. Inability or insufficient funds to keep pace with changes in technology will lead to inability to compete and obsolescence of inventory.
7. Legal claims .. Successful legal claims may result in large cash payments that can only be settled by liquidation.
8. Loss of key personnel ... may lead to inability to trade.
9. Excessive dependence on a small number of products, employees, suppliers, or customers; The loss of any of them may result in the inability to trade.

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