The Financial Accounting Standards Board has issued an Accounting Standards Update aimed at improving financial reporting by clarifying when and how public and private companies and not-for-profit organizations should prepare statements using the liquidation basis of accounting.
ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, is effective for interim and annual reporting periods beginning after Dec. 15, 2013, with early adoption permitted.
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 organization 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 organization will have available for distribution to investors after disposing of its assets and settling its obligations.
“Stakeholders have requested guidance on when and how to prepare financial statements using the liquidation basis of accounting,” FASB chairman Leslie F. Seidman said in a statement. “This standard addresses their concerns and reduces the diversity in practice that has resulted in the reporting of these activities.”
Under the new standard, an organization 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 organization 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), FASB explained.
In cases where a plan for liquidation was specified in the organization’s governing documents at inception (for example, limited-life entities), the organization 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 organization’s governing documents, FASB noted.
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 organization’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 recognized under U.S. generally accepted accounting principles (GAAP) for entities not in liquidation but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks).
• The organization’s liabilities as recognized and measured in accordance with the guidance in other topics that applies to those liabilities. Importantly, the organization 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.
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