ACCA Advanced Audit and Assurance (AAA) Practice Exam

What is a consequence of applying a break-up basis in accounting?

1. Non-current assets are reclassified as current

2. Current liabilities will decrease significantly

3. All liabilities will be settled immediately

4. Non-current assets will be valued at historical cost

The correct answer is: Non-current assets are reclassified as current

The application of a break-up basis in accounting typically involves analyzing a company's ability to continue operating as a going concern. When this basis is adopted, non-current assets are reclassified as current assets because the focus shifts to the assets’ realizable value in a liquidation scenario. This means that assets are expected to be sold in the near term rather than being held for the longer term, reflecting a change in the asset classification driven by the company’s inability to continue operations as planned. This reclassification is significant because it provides users of financial statements with a clearer picture of the company's immediate liquidity position and the expected cash flows in the event of liquidation. By recognizing non-current assets as current, it emphasizes the urgency and the immediate need for determining the liquidation value rather than the historical cost or value of the assets. The other options do not accurately represent the consequences or principles associated with applying the break-up basis. For instance, while current liabilities may be assessed as part of the overall financial health, the expectation doesn't necessarily imply a significant decrease; liabilities may remain or even increase as they are settled during liquidation. Similarly, while some liabilities may be settled faster under a break-up basis, it doesn't mean all liabilities will be settled immediately, nor does this basis typically influence