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Chapter 123 4

Going concern

ISA 570 Going Concern provides the following guidance.

2.1 Going concern concept

Going concern is the assumption that the entity will continue in
business for the foreseeable future. The foreseeable future is a
minimum of twelve months from the date of the financial statements.

 Financial statements are prepared on the basis that the reporting entity is a
going concern.

 A company should prepare its financial statements on a going concern basis
unless management intends to liquidate the entity or to cease trading or the
directors have no realistic alternative but to do so.

Where the assumption is made that the company will cease trading, the financial
statements are prepared using the break-up or liquidation basis under which:

 the basis of preparation and the reason why the entity is not regarded as a
going concern are disclosed.

 assets are recorded at likely sale values.

 inventory and receivables may need to be written down as inventory may be
sold for a lower price or may be scrapped, and receivables may not pay if they
know the company is ceasing to trade.

 additional liabilities may arise (redundancy costs for staff, the costs of closing
down facilities, etc.).

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