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Liquidation Basis of Accounting
 

Liquidation Basis of Accounting

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Public companies, private companies, not-for-profit organizations, and employee benefit plans may soon have more guidance about how to adapt their financial reporting when they cross the line from ...

Public companies, private companies, not-for-profit organizations, and employee benefit plans may soon have more guidance about how to adapt their financial reporting when they cross the line from going concerns to entities facing liquidation. Liquidation means the entity plans to convert its assets to cash, settle its obligations, and distribute any remaining cash or assets to its owners. The reasons for liquidation range from voluntary determinations, such as a decision that a company’s business model can no longer be sustained, to compulsory causes, such as an action by creditors or a court-ordered liquidation. Whatever the cause, when a company reaches this point, it means that general-purpose financial statements no longer provide the kinds of information most useful to creditors.
To promote consistent reporting in these unusual times, the FASB has issued a Proposed Accounting Standards Update (ASU) with guidance on how and when entities should apply a different basis known as the liquidation basis of accounting. This Messenger highlights the proposed guidance and open questions.

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    Liquidation Basis of Accounting Liquidation Basis of Accounting Document Transcript

    • Public companies, private companies, not-for-profitorganizations, and employee benefit plans may soonhave more guidance about how to adapt their financialreporting when they cross the line from going concernsto entities facing liquidation. Liquidation means theentity plans to convert its assets to cash, settle itsobligations, and distribute any remaining cash orassets to its owners. The reasons for liquidation rangefrom voluntary determinations, such as a decisionthat a company’s business model can no longer besustained, to compulsory causes, such as an actionby creditors or a court-ordered liquidation. Whateverthe cause, when a company reaches this point, itmeans that general-purpose financial statements nolonger provide the kinds of information most useful tocreditors.To promote consistent reporting in these unusualtimes, the FASB has issued a Proposed AccountingStandards Update (ASU) with guidance on how andwhen entities should apply a different basis known asthe liquidation basis of accounting. This Messengerhighlights the proposed guidance and open questions.MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRMA publication of the Professional Standards GroupAugust 2012Updated June 2013MHMMessengerLiquidation Basis of Accounting© 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.Highlights of proposed changesCurrently, there is minimal guidance on the liquidationbasis of accounting. The proposed ASU would providethe following guidelines and principles.1. Terms and conditions. To reduce diversity inpractice,theproposedASUwouldestablishuniformconditions that would trigger a requirement to usethe liquidation basis of accounting. Specifically:• A company or other entity would use theliquidation basis of accounting for its financialstatements when it determines that liquidationis imminent. Generally, this would mean that:(a) a plan for liquidation has been approvedby the person (or persons) with the authority tomake such a plan effective, and the likelihoodis remote that the execution of the plan willbe blocked by other parties, or (b) a plan forliquidation is imposed by other forces, and thelikelihood is remote that the entity will returnfrom liquidation.• In this context, the term “liquidation” wouldinclude liquidations caused by both voluntaryand compulsory causes. It would not include adissolution via a merger or acquisition.(Continued on Page 2)TMour roots rundeepTM
    • © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.2. Guidance for limited-life entities. Specialguidelines would apply to entities if their governingdocuments at inception provide a specific plan forliquidation. Included in this category are entitiescommonly known as “limited-life” entities. Forthese entities, liquidation would be consideredimminent when significant management decisionsabout furthering the ongoing operations of theentity have ceased or they are substantially limitedto those necessary to carry out a plan for liquidationthat differs from the plan specified in the governingdocuments. The proposed ASU provides a list offactors that indicate the plan has changed from theone specified in the original governing documents.Examples include the use of a different expectedliquidation date or disposals of assets in a mannerother than the one specified in the originalgoverning documents.3. Assets and liabilities. The liquidation basis ofaccounting would be applied by measuring assetsand liabilities at the estimated amount of cashot other consideration that the entity expects tocollect or expects to pay to settle its obligations.An entity using this basis of accounting wouldalso need to accrue the expected future costsand income to be incurred or realized during thecourse of liquidation, such as payroll expense andinterest income.4. Financial statements. The required financialstatements for a company using the liquidationbasis of accounting would include: (a) a statementof net assets in liquidation, and (b) a statement ofchanges in net assets in liquidation. These typesof financial statements are appropriate for entitiesfacing liquidation because they shift the emphasisfrom reporting about an entity’s economicperformance and position to reporting about theamount of cash that would be available to investorsafter liquidation. Companies using the liquidationbasis of accounting would be required to makecertain disclosures, including the following:• A statement that the financial statementsare prepared using the liquidation basisof accounting, including the facts andcircumstances surrounding the adoption of thisbasis.• A description of the entity’s plan for liquidation,including a discussion of how the entityexpects to dispose of its assets and how longthe liquidation is expected to take.• A description of the methods and significantassumptions underlying the measures ofassets and liabilities and any changes in thosemethods and assumptions.• A breakdown of the type and amount of costsand income accrued in the statement ofchanges in net assets in liquidation.5. Transition and effective date. The proposedchanges would be effective as of the beginningof the annual period of adoption and appliedprospectively from the day the liquidation becomesimminent. The effective date will be consideredfollowing the end of the comment period. If adoptedas proposed, early adoption would be permitted.Open questionsThe comment period is open until October 1, 2012,and the FASB is specifically requesting commentson a number of open questions, including whetherthe guidance on how to prepare the financialstatements is sufficient and operational, whether theguidance should differ for entities such as investment(Continued from Page 1)MHMMessenger(Continued on Page 3)
    • © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.companies whose primary measurement attribute isfair value, whether the guidance for limited-life entitiesis appropriate, and whether the same guidance shouldapply to both public and nonpublic entities (meaningprivate companies and not-for-profit entities) or, if not,how the guidance should differ for private companiesand not-for-profit entities.For more informationIf you have any specific questions, comments orconcerns, please share them with James Comito ofMHM’s Professional Standards Group or your MHMservice professional. James is located in our SanDiego office and can be reached at jcomito@cbiz.comor 858-795-2029.(Continued from Page 2)MHMMessengerThe information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.Please contact your MHM service provider to further discuss the impact on your financial statements.June 2013 Update: The guidance describedin this Messenger was revised and finalized inASU 2013-07. See our related Substance of theStandard for more information.