A.  Facts of the Case

1. A joint venture company promoted by a government undertaking and a private promoter has two manufacturing units.  The management of the day-to-day affairs of the company was vested with the private promoter until 17.2.1997 which was subsequently taken over by the government undertaking owing to large-scale misappropriations committed by the private promoter.  The company is now being run by the board of directors who are the nominees of the government undertaking.  Due to the large-scale misappropriations, the resources of the company had drained and the bankers had also frozen the limits resulting in the eventual suspension of the operations of the company from September, 1998.  The company’s case was referred to Board for Industrial and Financial Reconstruction (BIFR) and BIFR, vide its order dated 26.7.2000 had pronounced that the company was fit to be wound up.  BIFR has accordingly advised the Hon’ble High Court of Chennai to appoint the official liquidator for winding up of the company.

2. The company is in the process of compiling its accounts for the 18 months period from 1.10.1998 to 31.3.2000 and has been advised by certain experts that the principle of  ‘going concern’ would not apply to the company, which has been endorsed by the company’s board of directors also.  However, there are conflicting views on compilation of accounts in the case where the principle of  ‘going concern’ does not apply.  One view is that the company should prepare the profit and loss account and disclose all known liabilities and provide for the same.  Whereas the other view is that the company should only prepare the receipts and payments account and quantify the liabilities and disclose the same by way of explanatory note in the notes to accounts.  During the period under question, the company had a marginal turnover of Rs.3.84 lac from existing inventory.

B. Queries

3. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the fundamental accounting assumption of going concern would be valid for the company.

 

(b) If the principle of  ‘going concern’ does not apply to the company, whether the company should prepare a receipts and payments account or profit and loss account.

 

(c) If the company is required to prepare a receipts and payments account, how the liabilities should be disclosed and provided for.

 

(d) Whether the company would be justified in imputing a value to the inventory and sundry debtors despite the fact that the company is not in operation since September, 1998.

 

(e) If the answer to the above question is in the negative, whether the company would be justified in writing off the entire imputed value of debtors and inventory.

C.  Points Considered by the Committee

4. The Committee notes that paragraph 10(a) of Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, defines the fundamental accounting assumption of ‘Going Concern’, as follows:

“a.  Going Concern

 

The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.”

5. The Committee also notes that paragraph 3.2 of Accounting Standard (AS) 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’, defines ‘Events Occurring After the Balance Sheet Date’ as follows:

“3.2 Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity.

Two types of events can be identified:

 

(a)  those which provide further evidence of conditions that existed at the balance sheet date; and

 

(b) those which are indicative of conditions that arose subsequent to the balance sheet date.”

6. The Committee further notes that paragraph 13 of AS 4 provides the following:

“13.  Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.”

7. The Committee is of the view that conditions leading to liquidation existed on the balance sheet date, viz., the company's operations were suspended and its case was referred to BIFR, which indicated that the fundamental accounting assumption of going concern was not appropriate on the balance sheet date.  The order of BIFR dated July 26, 2000, for liquidation of the company, which is an event occurring after the balance sheet date, confirmed that the going concern assumption was inappropriate, as at the balance sheet date, and, therefore, it is required that assets and liabilities of the company should be adjusted for the effect.  In other words, the going concern assumption was not appropriate for the company for the purpose of preparation of financial statements.

8.  The Committee also notes that the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, recognises that if an enterprise has the need or the intention of liquidating or curtailing materially the scale of its operations, the financial statements have to be prepared on a different basis and the basis used should be disclosed (paragraph 23).  Accordingly, the Committee is of the view that the financial statements are required to be prepared even if the fundamental accounting assumption of going concern is not appropriate although basis of preparation thereof may be different.

9.  The Committee notes that the term ‘financial statements’ includes a statement of financial position at a given date, i.e., balance sheet, and a statement which presents the revenues and expenses for an accounting period, i.e., profit and loss statement. Therefore, the Committee is of the view that the company should prepare balance sheet and profit and loss statement for the period.

10. The Committee is of the view that since the going concern assumption is no longer appropriate, the financial statements should be prepared by the enterprise on the liquidation basis and the basis of preparation should be disclosed in the notes to accounts.  The Committee is also of the view that various assets and liabilities including inventories and sundry debtors should be valued on liquidation basis, i.e., how much the assets would realise, if disposed of, and how much would be payable to the creditors in the event of liquidation.  The liabilities such as those for gratuity and leave encashment would be required to be provided on the basis that how much would actually become payable to the employees.

D. Opinion

11. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 3:

(a) The fundamental accounting assumption of going concern would not be appropriate in the facts and circumstances of the company for the preparation and presentation of financial statements.

 

(b) The company should prepare the balance sheet and profit and loss account on liquidation basis and the basis for preparation of such financial statements should be disclosed.

 

(c)  In view of (b) above, receipts and payments account should not be prepared.  Liabilities should be valued on liquidation basis, i.e., how much would be payable to the creditors in the event of liquidation.

 

(d) The company should value all assets and liabilities including inventories and sundry debtors on the basis used for preparation of financial statements, i.e., liquidation basis. (e) Since the answer to (d) is not in the negative, the question does not arise.

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1Opinion finalised by the Committee on 17.1.2001.