ACCA Advanced Audit and Assurance (AAA) Practice Exam

What is commonly the effect of closing down operations on liabilities?

1. Liabilities are eliminated immediately

2. More liabilities may arise, necessitating additional provisions

3. Liabilities remain unchanged irrespective of actions

4. All liabilities become current

The correct answer is: More liabilities may arise, necessitating additional provisions

When a company closes down its operations, it often faces various obligations and potential liabilities that arise from the shutdown process. This situation frequently leads to additional liabilities that were not previously recognized or accounted for. For example, there may be costs related to the termination of employee contracts, settlement of outstanding debts, or environmental cleanup responsibilities that the company must face. As the liquidation process unfolds, it can necessitate the establishment of additional provisions in the financial statements to adequately reflect these emerging liabilities. These provisions help to ensure that all potential financial obligations are accounted for, providing a more accurate picture of the company’s financial position as operations cease. This understanding aligns well with the complexities of winding down a business, where liabilities can fluctuate based on the various factors and decisions that arise during the process. In contrast, suggesting that liabilities are eliminated immediately does not capture the ongoing responsibilities that a company may have during the closure. Similarly, the idea that liabilities remain unchanged disregards the dynamic nature of financial obligations during operational shutdowns, while the assertion that all liabilities become current overlooks the reality that not all liabilities are immediately payable and can have varying due dates or classifications.