Break Up Basis
Break Up basis is the assumption for accountant to prepare financial statements while they cannot use going concern assumption. Accountants have aware that the company will cease its operation shortly after the reporting date. Going concern is not appropriate for them to prepare their report.
In general, company needs to prepare financial statements base ongoing concern basis unless management wants to liquidate, cease major of its operation, or forced to declare bankruptcy. It means the company will only continue its operation in the foreseeable future. In this circumstance, going concern is not appropriate for them; they have to look for the alternative option.
The objective of a financial statement is no longer to access performance as the company is undergoing concern. The financial report will show the company ability to use assets to pay for all liabilities. Moreover, all long term liabilities will be converted to the short term as it will due when company ceases operation by declaring bankruptcy. Shareholders only receive the remaining wealth after all liabilities are settled.
On the other hand, the income statement is highly likely the same as it shows the company performance in the prior year.
Change in Balance Sheet
The following items must be changed to reflect with current situation:
Based on accounting standards, Inventory must carry at a lower cost and net reliable value. However, during closing down, the company may force to sell at much lower (huge discount) as they have no choice. Inventory valuation will impact significantly.
Property Plan and Equipment
PPE usually carries at cost less accumulated depreciation, but when company plan to sell them, they will become “asset available for sell” and recognize at the net recoverable amount. Moreover, they should be classified as a current asset.
Long term borrowing
First, reclass them to current liabilities and access if additional liabilities are required to included in balance sheet during liquidation process such as provision for redundancies and employees’ claims, settling the outstanding lawsuit, and other legal fees.