FASB Issues Standard on the Liquidation Basis of
Accounting
Norwalk, CT, April 22, 2013—The Financial
Accounting Standards Board (FASB) today issued an Accounting Standards Update
(ASU) that improves 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 December 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," stated FASB Chairman Leslie F. Seidman. "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). 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.
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.
The
final standard
and a FASB
in Focus document explaining the standard are available at
www.fasb.org.
About the Financial Accounting Standards
Board
Since 1973, the Financial Accounting Standards Board has
been the designated organization in the private sector for establishing
standards of financial accounting and reporting. Those standards govern the
preparation of financial reports and are officially recognized as authoritative
by the Securities and Exchange Commission and the American Institute of
Certified Public Accountants. Such standards are essential to the efficient
functioning of the economy because investors, creditors, auditors, and others
rely on credible, transparent, and comparable financial information. For more
information about the FASB, visit our website at http://www.fasb.org/.