Thai Accounting Standard (“TAS”) 1 states, “When preparing financial statements, management shall assess 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.”
Keywords: Mazars, Thailand, Accounting, Liquidation, TAS, TFRS, NPAEs, TFAC, Financial statements
13 July 2023
However, if an entity intends to liquidate, if liquidation is deemed imminent, or if a liquidation plan has been approved or has been imposed on an entity, it must prepare its financial statements with this in mind.
Prior to doing so, the entity should consider whether any adjustments to its assets and liabilities are necessary while preparing its financial statements on a going-concern basis. In the periods before liquidation, assets, including goodwill, intangible assets, and long-lived assets, should be evaluated for impairment. Generally, financial statements prepared for liquidation purposes do not reflect goodwill, as it usually has no realizable value in such a context.
On 1 March 2023, the shareholders of Company A approved the dissolution of the company. The liquidator then submitted the required documents to the Ministry of Commerce to register the company’s dissolution as of 15 March 2023. On that date, Company A had a net book value of machinery and equipment of THB 5 million.
On 30 April 2023, Company A sold this machinery and equipment, and received cash of THB 3.75 million. As a result, Company A had a loss of THB 1.25 million.
How should Company A recognize the income from the machinery and equipment sold in its financial statements for the period from 1 January 2023 to 15 March 2023?
TFAC has issued the following viewpoint on this:
- TAS 1, paragraph 25, states, “When preparing financial statements, management shall assess 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”.
- TAS 10, paragraph 14, states, “… 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.”
- TFRS for NPAEs, paragraph 12, states, “Going concern is the assumption that the entity will continue in operation for the foreseeable future. If substantial doubt exists with regard to the appropriateness of the going-concern assumption, the entity shall measure the items recognized in the financial statements using a method other than that specified in these financial reporting standards.
- Neither Thai Accounting Standards 1 nor 10 nor the TFRS for NPAEs provide any details regarding any alternative approach and how it might differ from a going-concern basis. Management should choose accounting policies that will result in the most relevant and reliable financial information. Entities will therefore need to give careful consideration to the appropriate method of preparation, bearing in mind their specific circumstances. The purpose of the TFAC’s viewpoint is not to provide guidance on determining whether an entity is or is not a going concern, but to provide insights on the matters to be considered when preparing financial statements on a going-concern basis is not appropriate. This includes the following:
- Measurement of assets and liabilities
Assets include those due from debtors, inventories, loans, fixed assets, and other assets measured at estimated amounts of cash or other consideration which the entity expects to collect or the lower of cost or net realizable value.
Liabilities include those due to creditors, provisions, and other liabilities which are recognized at the amount of consideration that the entity expects to pay or to expend to settle the obligation.
The difference between the book value and the amount of the assets and liabilities recognized by the entity should be adjusted in the statement of income for the liquidation period.
- Presentation and disclosure
An entity must disclose the relevant facts, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.
As noted above, the financial statements of an entity for liquidation purposes should reflect the amount of cash or other consideration that the company might reasonably expect to receive after the entity's assets have been liquidated and liabilities have been settled.
As a result, Company A should recognize and adjust the value of machinery and equipment from THB 5 million to THB 3.75 million on the date that it chooses to prepare its financial statements for liquidation purposes. The difference of THB 1.25 million should be recognized as an expense, with a note stating that it is a loss due to the impairment of machinery and equipment. Company A must also disclose this in the notes to the financial statements.
Reference: TFRS for NPAEs