Accruals, Cash and Break-up Bases, Going Concern and Fair Presentation

Before any transaction is recorded, an entity has to decide on what basis it is preparing its statements. The choice decides when income and expenses appear, and how assets and liabilities are valued.

This topic covers the three bases of accounting (accruals, cash and break-up), the going concern assumption that sits underneath them, what it means for statements to give a fair presentation, and the rare case in which an entity may depart from a standard to achieve it.

In the diets reviewed for this page none tests the topic directly. But it is background to every full set of statements in the paper, and it appears in short recall parts and in discussion of going concern. The Companies and Allied Matters Act (CAMA) 2020 makes a true and fair view the overriding test for a Nigerian company, as the legal framework topic explains.

Read the Conceptual Framework (ii): elements, recognition, measurement and capital maintenance first. The next topic covers how property, plant and equipment is recognised, measured and depreciated.

The three bases of accounting

Three bases go to the heart of how transactions are recognised and measured. The accruals basis is by far the most widely used.

Accruals basis

The accruals basis (also called the matching concept) recognises transactions and other events in the periods in which their effects occur, even if the cash is received or paid in a different period. Three rules follow.

• Revenue from sales and other income is reported in the period in which it arises, which may not be the period in which cash arrives.
• The cost of sales is matched with the sales it relates to, so income and its matching expenses fall in the same period.
• Other expenses are charged to the period to which they relate, not the period in which they are paid.

Cash basis

The cash basis recognises transactions in the period in which cash is received or paid. Revenue appears when the cash arrives, which may be later than when the income arose, and expenses appear when they are paid. Over the life of the entity the two bases recognise the same amounts, but they put them in different periods.

Illustration 1. A company with a 31 December year end sells goods for ₦50,000 on 6 December in Year 2 and receives payment on 15 January in Year 3. On the accruals basis the ₦50,000 is Year 2 revenue. On the cash basis it is Year 3 revenue. The amount is the same and the year is different.

Illustration 2. A company starts business on 1 September in Year 1 and pays ₦120,000 on that day for rent for 12 months. Its year end is 31 December. On the accruals basis the expense for Year 1 is four months, ₦120,000 × 4/12 = ₦40,000, and the remaining ₦80,000 is a prepayment, a current asset that belongs to Year 2. On the cash basis the whole ₦120,000 is an expense of Year 1.

Break-up basis

The accruals and cash bases both assume the business is a going concern. A business may instead be brought to an end, because of financial difficulty or, less commonly, because the owners decide it has run its course. The break-up basis is used when the entity is no longer a going concern.

Every asset is measured at the amount of cash it can be sold for, and every liability at the amount needed to settle it. For example, a building carried at ₦1,500,000 in an entity that is not expected to survive, which real estate professionals say could be sold for only ₦1,200,000, is remeasured to ₦1,200,000.

The going concern assumption

Financial statements are prepared on a going concern basis unless management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so. Management must assess the entity’s ability to continue as a going concern when it prepares the statements, taking into account all the information it has about the future. The look-ahead covers at least twelve months from the reporting date. Two disclosure rules apply.

• If management is aware of material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, it must disclose those uncertainties.
• If the statements are not prepared on a going concern basis, the entity must disclose that fact, the basis on which the statements are prepared and the reason it is not regarded as a going concern.

Warning signs

The following suggest that going concern may be in doubt, and each is a reason for management and the auditors to look harder.

• Financial: net current liabilities, loans near maturity with no realistic prospect of renewal, default on loan terms, negative operating cash flows, recurring losses, arrears of dividends, inability to pay creditors on time.
• Operating: loss of key management or a major market, customer or licence, labour difficulties, shortages of important supplies.
• Other: legal proceedings that could be costly, changes in law that harm the business, uninsured catastrophes.

Fair presentation

Financial statements are often said to show a true and fair view or to present fairly the position and performance of an entity. In Nigeria this is the central requirement of company reporting. Under international GAAP, International Accounting Standard (IAS) 1 Presentation of Financial Statements requires statements to present fairly the financial position, financial performance and cash flows of the entity.

The Conceptual Framework does not deal with it directly, but it says that statements which comply with the standards and have the desirable qualitative characteristics should convey what is generally understood as a true and fair view.

Fair presentation requires a faithful representation of the effects of transactions, other events and conditions, in line with the definitions and recognition criteria for assets, liabilities, income and expenses. Faithful representation means more than that the amounts are materially correct. Transactions must be accounted for in line with their substance and economic reality, which means their true commercial impact, instead of their legal form.

Amounts must also be classified and presented, and disclosures made, so that important information is not obscured and users are not misled.

Compliance with IFRS

Applying International Financial Reporting Standards (IFRS), with additional disclosure when needed, is presumed to give a fair presentation. An entity whose statements comply with IFRS must say so in the notes. It must not describe the statements as complying unless it meets all the requirements of every applicable standard and interpretation. Fair presentation can need more than the letter of the standards.

The spirit of a standard matters, and the duty to present fairly extends to transactions that no standard covers, including arrangements deliberately structured so that their economic substance differs from their legal form. A fair presentation requires an entity to:

• select and apply accounting policies in line with IAS 8, which tells it how to develop a policy where no standard applies;
• present information, including accounting policies, that is relevant, reliable, comparable and understandable; and
• give additional disclosures when the standards are not enough to let users understand the effect of particular transactions and events.

The true and fair override

In extremely rare circumstances management may conclude that complying with a requirement of a standard would be so misleading that it conflicts with the objective of financial statements. The entity then departs from the requirement, provided the relevant regulatory framework requires the departure or does not prohibit it. In Nigeria the true and fair view requirement in CAMA 2020 allows it, as the legal framework topic explains. The entity must disclose:

1. that management has concluded the statements present fairly the entity’s position, performance and cash flows;
2. that the entity has complied with applicable standards except for the departure needed to achieve fair presentation;
3. the standard from which it departed, the nature of the departure and the treatment the standard would require, the reason that treatment would be misleading, and the treatment adopted; and
4. for each period presented, the financial effect of the departure on each item that would have been reported had the requirement been followed.

If the regulatory framework prohibits the departure, the entity follows the requirement but discloses the standard that requires information it concludes is misleading, the nature of the requirement, why management considers it so misleading, and, for each period, the adjustments to each item that would be needed to achieve fair presentation. The aim is to reduce the misleading aspects to the maximum extent possible.

Other concepts in IAS 1

• Consistency of presentation. The presentation and classification of items stays the same from one period to the next. There are two exceptions: a significant change in the entity’s operations, or a review of its statements, shows that another presentation is more appropriate; or a standard requires a change.
• Materiality and aggregation. Each material class of similar items is presented separately. Dissimilar items are not combined unless they are immaterial. An item too small to show on the face of the statements may still be material enough for the notes. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence users’ decisions.
• Offsetting. Assets and liabilities are not offset against each other, and income and expenses are not offset, unless a standard requires or permits it. Showing inventory net of an allowance, or receivables net of an allowance for doubtful debts, is not offsetting. A disposal gain or loss is shown as proceeds less the carrying amount and selling costs, and expenditure reimbursed under a contract with a third party is netted against the reimbursement.
• Frequency and comparatives. Statements are presented at least annually. Comparative information for the previous period is given for all amounts unless a standard permits otherwise, and comparatives are reclassified when presentation changes, unless that is impracticable.

The ideas in more depth

The cash basis and the statement of cash flows

IFRS statements use the accruals basis, except for the cash flow statement, which by its nature records cash movements. The cash basis is also the natural basis for simple records kept by very small businesses and for some public sector reporting.

Why going concern matters for every number

Most carrying amounts, such as depreciated cost for equipment and inventory at cost, assume the entity will use or sell the assets in the normal course. If the entity will not, the assets may be worth much less than their carrying amounts and liabilities may carry penalties. That is why the going concern decision can change profit, net assets and the notes at once.

The change to IFRS 18

International Financial Reporting Standard (IFRS) 18 Presentation and Disclosure in Financial Statements replaces IAS 1 for annual periods beginning on or after 1 January 2027. The going concern and fair presentation requirements, and the rules on accounting policy disclosure, move to IAS 8, which is renamed Basis of Preparation of Financial Statements. They are substantially unchanged. The rules on offsetting, frequency of reporting, comparatives and consistency stay in IFRS 18 substantially unchanged. Until the new standard applies, IAS 1 is the standard to quote.

Sources and references

• IAS 1 Presentation of Financial Statements, general features: fair presentation, going concern, accrual basis, materiality and aggregation, offsetting, frequency, comparatives and consistency.
• IFRS 18 Presentation and Disclosure in Financial Statements and IAS 8 Basis of Preparation of Financial Statements, effective for annual periods beginning on or after 1 January 2027.
• Conceptual Framework for Financial Reporting (2018); Companies and Allied Matters Act 2020, Chapter 14 (financial statements).

These points are stated as at 5 November 2026.

Worked examples

1. Accruals basis.
   Profit = ₦600,000 − ₦380,000 = ₦220,000.
2. Cash basis.
   Profit = ₦520,000 − ₦340,000 = ₦180,000.
3. Difference.
   ₦220,000 − ₦180,000 = ₦40,000.
   Sales not yet received are ₦80,000 (₦600,000 − ₦520,000) and expenses not yet paid are ₦40,000 (₦380,000 − ₦340,000).
   The net ₦40,000 is income earned but not yet collected, less costs incurred but not yet paid.

1. Going concern basis, assets.
   ₦1,500,000 + ₦400,000 + ₦300,000 + ₦50,000 = ₦2,250,000.
2. Going concern basis, liabilities.
   ₦620,000 + ₦500,000 = ₦1,120,000.
   Net assets are ₦2,250,000 − ₦1,120,000 = ₦1,130,000.
3. Break-up basis, assets.
   ₦1,200,000 + ₦250,000 + ₦270,000 + ₦50,000 = ₦1,770,000.
4. Break-up basis, liabilities.
   ₦620,000 + ₦520,000 = ₦1,140,000.
   Net assets are ₦1,770,000 − ₦1,140,000 = ₦630,000.
5. Comment. Net assets fall by ₦500,000 (₦1,130,000 − ₦630,000). The notes must say the statements are not on a going concern basis, the basis used and the reason.

How to answer in the exam

• Distinguish. For accruals and cash, give the rule for revenue and the rule for expenses on each basis, and add a one-line example with numbers.
• Explain. Give the idea and one consequence. For break-up, say assets are at sale value and liabilities at settlement amount.
• State disclosures. List them as numbered points. For the override give the four points; for non-going concern give three (the fact, the basis, the reason).
• Discuss going concern. Give indicators in three groups (financial, operating, other) and say what management and the auditor do next.

Common mistakes in the exam

• Treating the cash basis as the IFRS basis. IFRS uses accruals, except for the cash flow statement.
• Expensing the full year’s prepaid rent in the year it is paid when the accruals basis is asked for.
• Applying break-up values but leaving liabilities at carrying amounts. Liabilities move to settlement amounts.
• Saying the look-ahead for going concern is the next financial year. It is at least twelve months from the reporting date.
• Departing from a standard because it is inconvenient. The override is for extremely rare cases.
• Claiming compliance with IFRS when one standard has been departed from.

Quick revision

• Accruals: when earned or incurred; matching. Cash: when cash moves. Break-up: sale values and settlement amounts.
• Going concern: unless liquidation, ceasing to trade, or no realistic alternative; look ahead at least twelve months; disclose material uncertainties.
• Fair presentation: faithful representation; substance over form; IFRS plus extra disclosure; policies under IAS 8.
• Override: extremely rare; only if the law does not prohibit it; four disclosures.
• Consistency, materiality, no offsetting unless allowed, annual reporting, comparatives.
• From 1 January 2027 going concern and fair presentation sit in IAS 8, substantially unchanged.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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