When the directors intend to liquidate the company or stop trading, or have no realistic alternative, FRS 102 forbids the going concern basis and the accounts must be prepared on a different basis. FRS 102 does not prescribe that basis, so the directors choose one that faithfully reflects the position, typically writing assets down to recoverable amounts, treating long term creditors as current and providing for onerous contracts, but not for future trading losses. The accounts must say that the going concern basis has not been used, what basis has, and why.

When does the going concern basis stop applying?

FRS 102 paragraph 3.8 says an entity is a going concern unless management either intends to liquidate it or to cease trading, or has no realistic alternative but to do so. Paragraph 2.30 says that in those circumstances the accounts shall be prepared on a different basis and must describe it.

The test is about intention or lack of choice, not about weak results. FRS Factsheet 13 stresses that the threshold for departing from the going concern basis is very high, because realistic alternatives often exist even if they depend on uncertain future events. A company with net liabilities, losses or a material uncertainty usually still uses the going concern basis, with disclosure. The basis changes in situations such as:

  • a decision to put a solvent company into a members’ voluntary liquidation;
  • a subsidiary whose trade is being transferred to its parent, so that it will cease trading;
  • a decision to close the business and apply to strike the company off;
  • an insolvent company with no realistic option other than liquidation.

Timing is set out in paragraph 32.7A: the going concern basis must not be used if management makes that determination after the year end but before the accounts are approved. Paragraph 32.7B explains why this is different from an ordinary post balance sheet event. The effect is so pervasive that it requires a fundamental change in the basis of accounting, not an adjustment to individual amounts.

Is there a prescribed “break up basis”?

No. ICAEW’s guidance for FRS 102 preparers states that FRS 102 does not specify an alternative basis, and that preparers must determine a basis that provides relevant information faithfully representing the non going concern circumstances. FRS Factsheet 13 says the same for micro entities under FRS 105: the basis is for the directors to determine. ISA (UK) 570 paragraph A27 refers to a liquidation basis as an example of another basis.

Company law allows for this. Paragraph 11 of Schedule 1 to the small companies accounts regulations (SI 2008/409) presumes the company is carrying on business as a going concern, and paragraph 10(2) allows the directors to depart from the accounting principles for special reasons, provided the note gives particulars of the departure, the reasons and its effect.

Many companies continue to apply the FRS 102 recognition and measurement rules, adjusted for the fact that the business is ending. ICAEW notes that a careful review of accounting policies is needed, because some policies become material only once the going concern basis is dropped.

What changes in the numbers?

ICAEW suggests that, depending on the circumstances, preparers applying FRS 102 consider:

  • Writing assets down to recoverable amounts. Plant, stock, debtors and intangibles are measured at what the company expects to recover from them in a wind down, rather than their value in continuing use. The mechanics are covered in impairment of assets under FRS 102.
  • Providing for onerous contracts. Commitments that have become onerous at the balance sheet date because the business is no longer a going concern, including staff employment contracts, are provided for. FRS 102 paragraph 21.11A requires the present obligation under an onerous contract to be recognised as a provision; see onerous contracts.
  • Reclassifying long term creditors. Amounts shown as falling due after more than one year move to within one year where the company no longer has an unconditional right to defer settlement for at least twelve months after the period end.

ICAEW is equally clear about what not to do. Recognising provisions for future losses, or anticipating gains on asset disposals, is not appropriate where the accounts are still prepared under FRS 102. That is consistent with paragraph 21.11B, which prohibits provisions for future operating losses. So a freehold that is expected to sell above book value is not written up to the expected price, and the expected losses of a three month run off are not provided in advance.

What must the accounts disclose?

FRS 102 paragraph 3.9 requires a company that does not prepare its accounts on a going concern basis to disclose that fact, the basis on which it has prepared them and the reason it is not regarded as a going concern. Factsheet 13 adds that the basis of preparation must describe the alternative basis adopted. For accounting periods beginning on or after 1 January 2026, paragraph 1AC.2C applies the paragraph 3.9 disclosure to small companies using Section 1A.

Micro entities have a lighter regime but not none. Factsheet 13 notes that FRS 105 paragraph 3.13A(e) requires a micro entity that is being wound up to disclose that fact.

A typical note reads along these lines: “On 12 February 2027 the directors resolved to cease trading and to place the company into members’ voluntary liquidation. The financial statements have therefore not been prepared on a going concern basis. Assets are stated at the lower of carrying amount and estimated recoverable amount, all liabilities are shown as falling due within one year, and provision has been made for contractual commitments that became onerous at the balance sheet date. No provision has been made for future trading losses.”

How does the auditor report on these accounts?

ISA (UK) 570 paragraph A27 says that where the going concern basis is not appropriate and management prepares the accounts on another basis, the auditor may be able to audit them and may give an unmodified opinion if there is appropriate disclosure of the basis, but may include an emphasis of matter paragraph to draw attention to it. See emphasis of matter paragraphs.

The reverse case is more serious. Under paragraph 21, if accounts are prepared on a going concern basis but the auditor judges that basis inappropriate, the auditor must give an adverse opinion, and paragraph A26 says this applies even if the accounts disclose that the basis is inappropriate.

How does this work in practice?

Illustration only. A company’s year end is 31 December 2026. In February 2027, before the accounts are approved, the shareholders decide to close it down. At the year end it had:

Item Going concern figure Treatment on the alternative basis
Machinery £60,000 net book value Written down to expected sale proceeds of £35,000 less selling costs
Bank loan repayable in 2029 £50,000 after more than one year Shown within one year if the bank can demand repayment on cessation
Office lease with two years left Lease liability or rent commitment Provision for any unavoidable onerous element
Expected run off losses Jan to Mar 2027 Not recognised Still not recognised
Expected profit on sale of freehold Not recognised Still not recognised

The decision in February is a determination after the year end, so paragraph 32.7A applies to the 2026 accounts even though the company was trading normally on 31 December.

What mistakes come up most often?

  • Abandoning the going concern basis because of losses or net liabilities, when the correct answer is going concern with a material uncertainty disclosure.
  • Keeping the going concern basis after the board has resolved to liquidate.
  • Writing assets up to expected sale proceeds, or providing for future trading losses.
  • Leaving long term liabilities in creditors due after more than one year.
  • Describing the basis vaguely as “break up basis” without saying what was done.
  • Forgetting the tax side of closure, covered in closing a limited company.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.