Sec 1 - Liquidation Basis of Accounting

Question 1

Liquidation

Answer 1

• Liquidation is the process in which a company converts its assets to cash and settles its liabilities. An entity in liquidation is not a going concern*, but rather an entity that *has a plan for liquidation.
• Liquidation is imminent when (ASU 2013-07):
  
  • A plan for liquidation approved by the person (s) who have the authority to make the plan effective and the likelihood is remote that the execution of the plan would be blocked by other parties, or
  • A plan for liquidation is _being imposed on the entity by other forces_ (i.e., forced bankruptcy).

Question 2

Principles for Recognition and Measurement

under Liquidation Basis of Accounting (ASU
2013-07):

Answer 2

• Assets are presented at the amount of cash expected from the liquidation process.
• The asset values may not equal fair value because the assets are being sold through a process of liquidation which may deflate the assets value.
• Liabilities are recognized and measured in accordance with U.S. GAAP as required for those liabilities.
• Liabilities can be reduced only if legally forgiven. The entity _cannot write down a liability_ in anticipation of forgiveness.
• The entity must present a statement of net assets in liquidation and a statement of changes in net assets in liquidation.

Question 3

Disclosures Required under Liquidation Basis of Accounting

Answer 3

• Because the entity is no longer a going concern, disclosures are required that will aid the understanding of the entity’s statement of net assets in liquidation and statement of changes in net assets in liquidation.
• The disclosures will help understand the amount of cash the entity expects to collect and the amount of cash the entity is obligated to pay during the course of liquidation.
• These disclosures included:
  
  • A statement that the financial statements are presented using the liquidation basis of accounting
  • Description of the liquidation plan
  • Methods and significant assumptions used to measure assets and liabilities
  • Type and amount of costs and income accrued associated with the liquidation plan.