22 April 2013

FASB: Preparation of statements using the liquidation basis of accounting

Liquidation is the process by which a company converts its assets to cash or other assets and settles its obligations with creditors in anticipation of ceasing all of its activities. An organisation in liquidation must prepare its financial statements using a basis of accounting that communicates information to users of those financial statements to enable those users to develop expectations about how much the organisation will have available for distribution to investors after disposing of its assets and settling its obligations.

Under the new standard, an organisation will be required to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent”. Liquidation is considered imminent when the likelihood is remote that the organisation will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). In cases where a plan for liquidation was specified in the organisation’s governing documents at inception (for example, limited-life entities), the organisation should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified in the organisation’s governing documents.

The Update requires financial statements prepared using the liquidation basis to present relevant information about a company’s resources and obligations in liquidation, including the following:

• The organisation’s assets measured at the amount of the expected cash proceeds from liquidation. Included in its presentation of assets should be any items it had not previously recognised under US GAAP for entities not in liquidation but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks).
• The organisation’s liabilities as recognised and measured in accordance with the guidance in other Topics that applies to those liabilities. Importantly, the organisation should not anticipate that it will be released from having to pay those liabilities.
• Accrual of the costs it expects to incur and the income it expects to earn during liquidation, including any anticipated disposal costs.

ASU No. 2013-07, 'Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting', is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted.

Press release

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