What happens when a company can no longer operate?
In the life of an entity, there may come a time when its continuity is in doubt. NIF A-2: Going Business It seeks to establish the basis for preparing financial statements when there is uncertainty as to whether the company will continue to operate normally or enter into a liquidation process.
1. Imminent liquidation
One of the key points is identifying when an entity ceases to be a going concern. This occurs when:
- The administration decides to liquidate or cease activities and there is no realistic alternative to continue.
- He liquidation plan has been approved by the highest decision-making body (MATDO), either voluntarily or imposed by an authority, for example in the case of bankruptcy.
In this scenario, NIF A-2 establishes that financial statements must be prepared under the assumption of liquidation, abandoning the presumption of permanent existence.
2. Suspension of activities
Temporary suspension does not necessarily mean liquidation.
- A company may pause operations for reorganization purposes and remain a going concern.
- Only when the suspension is linked to the termination of activities and legal dissolution should it be considered imminent liquidation.
3. Net Liquidation Value (NLV)
Instead of measuring assets based on their normal use, the Net Liquidation Value (NLV), defined as the amount expected to be received upon the disposal of an asset or the amount that would have to be paid to settle a liability in a liquidation process.
Example:
- A machine with a book value of $500,000 can only be sold for $200,000 in liquidation.
- That will be your VNL, and the adjustment should be recognized in the financial statements.
4. Recognition of previously unrecorded assets
In liquidation, the entity may recognize assets that previously did not meet the definition under traditional MFRS, provided their value can be estimated and they can be used to settle liabilities.
Example: trademarks, patents or designs that can be sold.
5. Estimated costs and income
Initially, it was proposed to recognize expected revenues and costs before the settlement was finalized. However, following comments during the consultation process, this option was eliminated:
- Only costs and revenues actually incurred should be recognized.
6. Intermediate dates
When a company enters this process, it must update its financial information as of the closest closing date, even if it has submitted previous statements. This ensures that users have up-to-date information on the company's situation.
7. RT 50 and its replacement
He Technical Report 50 (RT 50), issued in 2021 by CINIF, was very useful during the COVID-19 pandemic to guide how to report when there was doubt about business continuity.
With the entry into force of NIF A-2, this report became void, as the standard now formally incorporates the necessary guidelines.
Practical example
A trading company faces continued losses, and its board of directors approves its liquidation in 2025.
- Recognizes its assets by Net Liquidation Value:
- Inventories with a book value of $1,000,000 → VNL of $600,000.
- Machinery with a book value of $500,000 → VNL of $200,000.
- Unregistered trademarks and patents are recognized, with an estimated value of $150,000.
- Liabilities are adjusted to their net asset value, taking into account possible discounts in settlement negotiations.
Result: The financial statements present the actual recovery status of assets and obligations during the closing process, providing greater transparency to investors, creditors, and other users.
Conclusion
The NIF A-2 It marks a turning point in the preparation of financial statements when a company ceases to be a going concern.
Its application allows:
- Clarity and transparency in financial information.
- Proper recognition of assets and liabilities in liquidation.
- Protection for users of financial statements by showing the economic reality of the company.
In this way, a regulatory framework is established that prevents accounting distortions and allows for informed decisions at a critical time for the entity.
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