EPFO APFC 2023 General Studies · Question 77 of 120

Correct — C, (c) going concern assumption. The going concern assumption is the presumption that an enterprise will continue in operation for the foreseeable future, having neither the intention nor the necessity of liquidating or of curtailing materially the scale of its operations. Accounting Standard 1 on the disclosure of accounting policies names it as one of the three fundamental accounting assumptions, alongside consistency and accrual, and it is fundamental in a literal sense: it is assumed without being stated, and it only has to be disclosed when it is not followed. Everything the question describes follows from it. If the business is going to continue, then its assets are held in order to be used rather than sold, so the figure that matters is what the asset is worth to the business in use — its intrinsic value in the language of the stem — and not the amount it would fetch if it had to be disposed of today. That is why a machine appears at cost less accumulated depreciation rather than at second-hand market price, why depreciation is spread over the asset's useful life rather than charged in full at once, why prepaid expenses are carried forward as assets, and why the whole apparatus of accruals and deferrals makes sense at all. Reverse the assumption and the accounting changes completely: where an enterprise is about to be wound up, its statements are prepared on a liquidation basis with assets stated at net realisable value, liabilities reclassified as current, and the departure from the going concern basis disclosed. The stem's contrast between intrinsic value and realizable value is therefore precisely the contrast between accounting for a continuing business and accounting for one that is about to stop.

• (a)money measurement concept — This concept determines what gets recorded, not at which value. It holds that only those transactions and events which can be expressed in monetary terms are recorded in the books, which is why a firm's accounts show the cost of its plant but say nothing about the quality of its management, the morale of its workforce, the loyalty of its customers or a dispute with a regulator that has not yet crystallised into a liability. A second and often forgotten limb of the same concept is the assumption of a stable monetary unit, under which rupees of different years are added together as though their purchasing power were the same, a simplification that historical cost accounting accepts and that inflation accounting attempts to correct. Neither limb has anything to say about the choice between intrinsic and realisable value, which is a question about the basis of valuation and not about the boundary of the record.
• (b)matching concept — The matching concept governs the timing of expenses in the profit and loss account: costs are recognised in the same period as the revenues they help to generate, which is why the cost of goods sold is set against the sales of the same period, why outstanding expenses are brought into account and prepaid ones carried forward, and why the cost of a long-lived asset is spread across the years that benefit from it. It is closely connected to the answer, since depreciating an asset over its useful life is a matching exercise made possible by the assumption that the business will still be there over those years, but the connection runs the other way from what this option supposes. Going concern is the assumption; matching is one of the practices it permits. The question asks what justifies valuing an asset by its usefulness to a continuing business rather than by its sale price, and that is an assumption about the life of the enterprise, not a rule about which period an expense falls in.
• (d)consistency principle — Consistency requires that accounting policies be applied in the same way from one period to the next, so that the results of successive years can be compared, and that any change in policy be disclosed along with its effect. It constrains how a firm may move between permissible treatments; it does not choose between them. A firm valuing its assets on a realisable basis every year would be perfectly consistent and would still be accounting on the wrong footing for a continuing enterprise. Note that consistency is, like going concern, one of the three fundamental accounting assumptions of Accounting Standard 1, which is exactly why it is placed in this option set — it is the right kind of concept in the wrong role. Distinguish assumptions that fix the basis of preparation from those that govern comparability across periods, and this option separates itself from the answer at once.

Accounting Standard 1 on the disclosure of accounting policies rests on three fundamental accounting assumptions — going concern, consistency and accrual — which are taken to have been followed unless the contrary is disclosed. Going concern presumes that the enterprise will continue in operation for the foreseeable future, with neither the intention nor the necessity to liquidate or to curtail its operations materially. Consistency presumes that the same accounting policies are followed from one period to the next. Accrual presumes that revenues and costs are recognised as they are earned or incurred rather than as cash is received or paid, and recorded in the period to which they relate. Around these sit the concepts that shape the record itself: the business entity concept, which separates the firm from its owners; money measurement, which limits the record to what can be expressed in money and assumes a stable monetary unit; the cost concept, under which assets enter the books at what was paid for them; the periodicity or accounting period concept, which cuts a continuing business into reporting years; realisation, which fixes the point at which revenue may be recognised; and matching, which aligns costs with the revenues they produce. Going concern is logically prior to several of these. Historical cost, depreciation over useful life, the carrying forward of prepayments and the very idea of dividing an indefinite business life into annual periods all depend on the presumption that the enterprise will continue.

The accountancy block of this paper tests whether a candidate can name the concept that a described practice rests on, which is a different skill from computation and is worth preparing separately. The questions are built by describing a familiar treatment in neutral language and offering four concepts, of which one is the true foundation, one or two are genuine concepts operating at a different level, and one is a near neighbour. The technique that works is to ask what would change if the named concept were abandoned. Abandon going concern and assets must be restated at what they would fetch on a break-up, which is exactly the practice the stem contrasts with; abandon consistency and the year-on-year comparison fails but the valuation basis is untouched; abandon matching and the profit of a period is misstated while the balance sheet basis is unaffected; abandon money measurement and the item would not appear in the accounts at all. That test isolates the answer without any need to recall a definition word for word. For an Assistant Provident Fund Commissioner the underlying idea also has a practical edge, since an establishment's ability to meet its statutory dues is judged on the footing that it will continue to operate, and a doubt about that footing changes how its accounts must be read.

• The going concern assumption presumes that an enterprise will continue in operation for the foreseeable future, with neither the intention nor the necessity of liquidation or of curtailing the scale of its operations materially.
• Accounting Standard 1 names three fundamental accounting assumptions — going concern, consistency and accrual — which are taken as followed unless a departure is disclosed, in which case the fact must be stated.
• Because the business is assumed to continue, assets are carried at cost less depreciation, that is at their value in use, rather than at the amount they would realise on sale, and depreciation is spread over the asset's useful life.
• Where the going concern basis is not appropriate, financial statements are drawn up on a liquidation basis, with assets stated at net realisable value and the change in basis disclosed.
• The money measurement concept limits the accounts to what can be expressed in money and assumes a stable monetary unit, so it governs what is recorded rather than at what value.
• The matching concept aligns expenses with the revenues of the same period and the consistency principle requires the same policies to be applied from period to period; neither determines the basis on which assets are valued.

• Choosing matching because depreciation is involved; depreciation is a matching exercise made possible by going concern, and the question asks what justifies the valuation basis rather than the timing of the charge
• Choosing consistency because it too is a fundamental accounting assumption; consistency governs comparability between periods and does not select a valuation basis
• Treating money measurement as a rule about value rather than about what may enter the accounts at all
• Assuming going concern is invariable; where liquidation is intended or unavoidable, statements are prepared at net realisable values and the departure must be disclosed
• Confusing intrinsic or in-use value with market or realisable value, which is precisely the distinction the stem is drawing

The accountancy questions in this paper divide into two kinds, and this is the conceptual kind: a practice is described in a sentence and the candidate must name the concept, assumption or principle behind it. The option set always contains more than one genuine concept, so elimination by unfamiliarity never works, and the discrimination comes from knowing what each concept actually governs — the boundary of the record, the timing of recognition, the basis of valuation or the comparability of periods. Expect the same block to ask the fundamental accounting assumptions by name, to ask which consideration governs the selection of accounting policies, and to ask what happens when a concept is departed from. Preparing a short table of concepts against the question each answers is the most efficient route, because a single such table covers every conceptual item the paper is likely to set.

No directly related past PYQ was found.

• practice — not a real PYQ

  Which one of the following is NOT one of the fundamental accounting assumptions recognised in Accounting Standard 1 on Disclosure of Accounting Policies?

  • (a)Going concern
  • (b)Accrual
  • (c)Consistency
  • (d)Prudence

  Answer(d) Prudence — the three fundamental accounting assumptions are going concern, consistency and accrual, and they are presumed to have been followed unless a departure is disclosed. Prudence is not an assumption but one of the three major considerations governing the selection and application of accounting policies, along with substance over form and materiality, and the difference between an assumption and a consideration is a favourite point of examination.

• practice — not a real PYQ

  If the going concern assumption is no longer appropriate for an enterprise, its assets in the financial statements should ordinarily be stated at

  • (a)historical cost less accumulated depreciation
  • (b)net realisable value
  • (c)replacement cost
  • (d)the value certified by the promoters

  Answer(b) net realisable value — once the enterprise is to be wound up rather than continued, its assets will be sold rather than used, so they are stated at what they are expected to realise, liabilities are reclassified accordingly, and the fact that the statements are not prepared on a going concern basis must be disclosed. Historical cost less depreciation is the carrying basis appropriate to a business that will continue, which is precisely the practice the going concern assumption supports.