[Opinion] Liquidation Basis Financial Statements | Ind AS and SA 570

Himesh D. Gajjar – [2025] 175 taxmann.com 470 (Article)

When an entity faces irreversible financial distress, Indian accounting standards mandate a shift from the traditional going concern basis to liquidation basis for financial statement preparation.

Ind AS 1 (Presentation of Financial Statements) and SA 570 (Revised) (Going Concern) provides guidance for preparing financial statements on a liquidation basis. This approach measures assets at net realisable value and liabilities at estimated settlement amounts, reflecting the entity’s inability to continue operations.

In this article, we will discuss the regulatory framework regarding preparation of financial statements on a liquidation basis, cases which warrant financial statements to be prepared under liquidation basis, what are the points that as a statutory auditor needs to be considered.

Ind AS 1: Presentation of Financial Statements

Para 25

“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 management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. 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.”

Para 25 outlines the guidelines as to when the entity can prepare its financial statements on a liquidation basis. It also provides for the disclosure requirements if the entity has not prepared the financial statements on a going concern basis. This para asks the entity to disclose the following information:

• Disclose the fact that the financial statements have been prepared on a liquidation basis
• Disclose the uncertainties which lead the entity to prepare the financial statements on a liquidation basis
• Disclose the reason as to why the entity is not regarded as a going concern.
  Para 26

“In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.”

Para 26 talks about the assessment of going concern and what are the factors that management needs to consider while assessing the going concern. It also considers the subjectivity of each case. While assessing the impact of going concern, the entity with the history of profit does not warrant a specific analysis to arrive at the conclusion about the going concern.

In case of loss-making entity, management needs to be extra vigilant and consider various factors such as expected profitability, debt repayment capacity, potential sources of finance before arriving at the conclusion of going concern. Ind AS 1 does not provide for events or conditions that casts doubt on going concern.

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