What is the underlying assumption of Financial Statements?
When financial statements are prepared on the accrual basis of accounting, the effects of
transactions and other events are recognized when they occur (and not as cash or its equivalent is
received or paid), and they are recorded in the accounting records and reported in the financial
statements of the periods to which they relate.
The accrual basis assumption is also addressed in IAS 1, Presentation of Financial Statements,
which clarifies that when the accrual basis of accounting is used, items are recognized as
assets, liabilities, equity, income, and expenses (the elements of financial statements) when they
satisfy the definitions and recognition criteria for those elements in the Framework.
When financial statements are prepared on a going concern basis, it is assumed that the entity
has neither the intention nor the need to liquidate or curtail materially the scale of its operations,
but will continue in operation for the foreseeable future. If this assumption is not valid, the
financial statements may need to be prepared on a different basis and, if so, the basis used is disclosed.
The going concern assumption is also addressed in IAS 1, which requires management to
make an assessment of an entity’s ability to continue as a going concern when preparing financial