14th July 2022
The IFRS Blog is a series of topical issues, common issues and live cases in IFRS Standards and financial reporting.
Liquidation of companies and IFRS by Ricardo Ruiz, MGI LT Accountant & Asociados, Dominican Republic
International Financial Reporting Standards (IFRS) do not specify what should be done when an entity cannot continue as a going concern, either because shareholders have decided not to continue operations, bankruptcy has been declared, or an external cause (COVID 19, state of internal commotion, competition, war or political sanctions) has forced it to end its operations. The IFRS establish that the financial statements of entities are prepared on the assumption of going concern, that the company will continue to operate, and if not any significant uncertainty or intention not to proceed should be disclosed.
IAS 1 states “When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements 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. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern” (IAS 1.25).
In this same line of thinking IAS 10 states that “an entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period date either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so” (IAS 10.14).
What to do
According to the IFRS, in the absence of explicit guidance, an entity's management “...may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards.” (paragraph 12, IAS 8).
Management should choose accounting policies (based on geography, country, or national professional body statements) that allow for a fair presentation. Therefore, entities/companies will need to determine the most appropriate basis for preparation given their circumstances and its environment.
One of the standards that an entity could take into account is the pronouncement of the FASB, the body responsible for the issuance, discussion and promulgation of the generally accepted accounting principles in the United States. This promulgated in April 2013, the Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205), Liquidation Basis of Accounting, for companies that are in the process of liquidation or that are declared in liquidation.
In Latin America many professional associations have an order of priority in the application of accounting standards, although most apply IFRS, they have FASB pronouncements as supplementary principles. This changes according to different jurisdictions or geographies (see Resolution 11162, 18 October 2013 from the Institute of Accounting and Auditing of Accounts (ICAC) in Spain.)
In accordance with paragraph 205-30-25-1 of the standard, an entity will prepare its financial statements using “the liquidation basis of accounting” when liquidation is imminent, whether decided by authorised persons or imposed by external forces.
The pronouncement requires that the financial statements of an entity in liquidation must be prepared using “the liquidation accounting base” to present relevant information about the expected resources and the resources that are committed when that situation arises.
Section 205-30-30-1 establishes that “an entity shall measure assets to reflect the estimated amount of cash or other consideration that it expects to collect in settling or disposing of those assets in carrying out its plan for liquidation. In some cases, fair value may approximate the amount that an entity expects to collect. However, an entity shall not presume this to be true for all assets.”
Section 205-30-45-1 regarding other filing matters states that “At a minimum, an entity that applies the liquidation basis of accounting shall prepare the following:
a. A statement of net assets in liquidation
b. A statement of changes in net assets in liquidation.”
IAS 1 requires adequate disclosure of the basis of preparation and its effects when an entity prepares its financial statements on a basis other than the going concern basis. Therefore, it is advisable to disclose the nature of any deviation from IFRS, the reason for any reclassification of non-current assets or liabilities to the current one, the revaluation or impairment of assets, key assumptions and judgments made by management. Any legal matter to be taken into account based on the law of the corresponding jurisdiction should also be explained.
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