The principle of continuity is one of the fundamental accounting principles of Moroccan accounting. Indeed, the General Code of Accounting Standards (CGNC) states that, to establish its financial statements, the company must ensure that it is able to continue its activities beyond the end of the fiscal year. If a cessation of activity is foreseen, the accounts must be established in liquidating value. The principle of continuity is also know as the “going concern” principle.
Understanding the principle of continuity:
The CGNC standardizes the method of preparing financial statements. In fact, the company must establish its financial statements on the assumption that it will continue its business. In other words, the company must ensure its activities will be maintained for the foreseeable future.
As such, financial statements’ makers assume that the company has neither the intention nor the necessity to terminate its business.
Moreover, they presume that it does not intend to significantly reduce the size of its business. If there is such a need, the company should prepare its financial statements on a different basis.
In such a case, this basis must be indicated in the financial notes.
Consequences of a cessation of activity
The principle of continuity impacts the application of other accounting principles, methods and rules.
In fact, if the conditions for a total or partial cessation of activity are met, then:
- First, the company must discard the assumption of continuity;
- Second, the company must establish its accounting using liquidating value.
Therefore, this situation challenges the application of the following principles:
- First, consistency of methods
- Then, historical costs
- Finally, separation of accounting periods
Examples of the effects of a business termination on current valuation rules:
In the event that the situation requires the company to retain the hypothesis of cessation of activity, the company must :
- Take back all the deferred charges that were to generate future profits;
- Take into account the eventual disposal value of:
- Tangible assets
- Receivables, based on their probability of recovery.
- Increase its liabilities to take into account
- Possible severance payments
- Tax risks which the liquidation may entail