FRS 105 and going concern

Micro company and selling the business

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We have a micro company (FRS 105) where they have decided to sell their business via an asset purchase agreement for £50k - plant £20k and goodwill £30k.

In similiar scenarios we have extended the year end and prepared say a final 15 month period of accounts.

We can't extend the accounting period so we have last year's accounts to be finalised and then a final period to cessation.

FRS 105 seems quiet on accounting guidance if the company is no longer a going concern so would be grateful for advice on the correct accounting treatment in order to finish off last year's accounts.  The fixed assets nbv is £30k, there is no goodwill in the accounts and there are long term loans.  To finalise last year's accounts - should the fixed assets be restated to asset sale price and the long term loans restated to current liabilities?  Goodwill only to appear in the final cessation period?




Replies (7)

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paddle steamer
22nd Aug 2023 15:22

Where is the business sale regarding it being contractually binding?

If it is binding, when was it contractually binding, before YE or after YE?

If it falls through will your client continue trading until A N Other buyer appears?

How long after year end until sale ought to settle?

Can you wait and see before lodging accounts?

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Replying to DJKL:
By Alwaysreading
22nd Aug 2023 16:41

The year end still to be finalised is 31 Jan so we are are talking a good 6 months after this before the sale was agreed. If the sale falls through they will continue to trade until another buyer is found.

There was no intention to sell prior to 31 Jan.

Agreed on the gain on disposal.

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paddle steamer
22nd Aug 2023 15:23

p.s. Goodwill will never appear in the accounts, a gain on disposal will appear.

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By paul.benny
22nd Aug 2023 16:22

+1 to there being a gain on disposal. Allocation of purchase consideration as described may not be the most tax optimal.

Loan should only be restated to current if borrower has right (or obligation) to repay early.

Is there any stock or debtors? If they are not going to be realised at book value you need to write down to expected value

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Replying to paul.benny:
By Alwaysreading
22nd Aug 2023 17:17

Stock/debtors not an issue.

What we are trying to clarify is whether in the 31 Jan accounts:

a) Fixed assets should be written down to today's sale value?
b) LT loan should be restated to current liabilities? Will need to check loan agreement to see if borrower has right to pay early.

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Replying to Alwaysreading:
By paul.benny
23rd Aug 2023 10:27

Now you've given an indication of dates, it all makes a little more sense.

FRS105 s26 is relevant - events after the balance sheet date. Essentially, the required adjustments are any that provide evidence of conditions at the balance sheet date.

On the information given, the apportionment of the purchase consideration appears arbitrary and is not indicative of a reduced value of the fixed assets. You should consider a fair value adjustment if Buyer is not taking stock and debtors at book.. I don't think the loan should be reclassified as current as contractually it remains due >1 year.

From what you've said, the sale is provisional and is not forced (ie business can continue), I see no reason not to prepare financial statements on going concern basis

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By taxdigital
22nd Aug 2023 19:20

Let me see if I could help:
- I presume you're the preparer?
- The accounting year ended 31 Jan 2023. So, you have time until 31 October to file the accounts.
- Is the entity still trading or has it stopped trading?
- Repeating DJKL's point - has the sale gone through or is there a binding contract as yet, before the signing date?

Copied and pasted from various sources:

The going concern basis of accounting is appropriate unless management either intends to liquidate the entity or cease trading or has no realistic alternative but to do so (FRS 105.3.3).

If the directors conclude that the going concern basis of accounting is no longer appropriate, the financial statements should not be prepared on a going concern basis (FRS 105. 26.8).

If there is a binding contract at the time of signing the accounts, as a preparer you will need to determine an appropriate basis that provides all the relevant information that faithfully represents the non-going concern circumstances of the entity.
Which means:

- writing down assets to their recoverable amounts;
- reclassifying ‘creditors falling due after one year’ as ‘creditors falling due within one year’ where the entity no longer has an unconditional right to defer settlement for at least twelve months after the period end.

As FRS 105 is about limited disclosures where basic legal requirements have been complied with, the accounts may be presumed by law to give a true and fair view.
The intention of the management to sell the trade should be disclosed.

If the sale hasn't concluded I would think that disclosing the management's intention should be good enough.

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