break up basis

Look at a SoFP in any set of accounts prepared on a going concern basis – think about what amounts and their presentation means. For example:
– Plant and equipment – assets that will be used up in the business over coming years – carried at depreciated cost
– Inventory – carried at lower of cost and NRV
– Long-term borrowings – to be repaid after 12 months.
These are just 3 things. Now think, if the company ceases to trade (so the company will be “broken up”) – what happens to these amounts and their presentation?
Basically, because the assets will be recovered/sold to discharge liabilities (shareholders will probably get nothing):
– All non-current assets should now be carried at a net recoverable amount – and presented as current assets
– Inventory should be written down to what it can be sold for – not in the ordinary course of business but at “closing down” prices (for example)
– All long-term borrowings must be reclassified as current liabilities.
It is likely that there will be additional liabilities to be provided for in the financial statements when drawn up on break-up/liquidation basis – e.g. provisions for making redundant the entire workforce and the costs of liquidation.