EastJet Airlines reported a $1-million loss for the year ended December 31, 2019. After financial restructuring in 2019, EastJet continued to report losses, and it reported a $900,000 loss for the year ended December 31, 2020. In June 2021, EastJet was preparing to ask the Canadian government to allow it to make reduced cash contributions to one of the company’s pension plans as well as to reduce other financial pressures. A spokesperson for the company stated, “It is of critical interest for the company to gain that relief now, thereby assuring its long-term solvency.” Solvency refers to the company’s ability to repay its long-term debt and survive over a long period of time.

Instructions

a. EastJet’s December 31, 2020, financial statements were prepared using the cost model. What assumption did EastJet make about its operations?

b. With the uncertainty facing EastJet, should the company’s financial statements be prepared under the assumption that it will continue to operate for the foreseeable future? Explain.

Taking It Further

Explain the implications of the full disclosure concept for EastJet’s financial statements in these circumstances.