Companies on the brink of collapse must now use the liquidation basis of accounting, according to new guidance from the Financial Accounting Standards Board. Financial statements will now have to be prepared that show the values of assets and liabilities in terms of expected cash proceeds from liquidation. Plus, any assets not previously recognized under U.S. GAAP will need to be valued and presented in the statements, including intangibles such as trademarks, brand names, copyrights, and the like.
Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent.” Liquidation is imminent when: (a) a plan for liquidation has been 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 the entity will return from liquidation; or (b) a plan for liquidation is imposed by other forces, and the likelihood is remote that the entity will return from liquidation.
Measurement: Assets must be valued at the estimated amount of cash proceeds or other consideration that it expects to collect in settling or disposing of those assets in carrying out its plan for liquidation. An entity will recognize and measure its liabilities in accordance with U.S. GAAP that otherwise apply to those liabilities. In measuring the liabilities, there should be no expectation that the entity will be legally released from being the primary obligor under those liabilities, either judicially or by creditors. Also, any expected costs related to the disposal of assets or settlement of liabilities must be included.
“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.”
Effective date: The standard applies to all entities reporting under U.S. GAAP, except investment companies that are regulated under the Investment Company Act of 1940. It is effective for annual reporting periods beginning after Dec. 31, 2013, and interim reporting periods therein.