FASB clarifies liquidation basis of accounting guidance
The Board has issued Accounting Standards Update (ASU) 2013-07, Liquidation Basis of Accounting, to clarify guidance on how and when to use the liquidation basis of accounting. The new standard is designed to address constituents' requests for clarified guidance and is expected to reduce diverse practices in this area.
The ASU requires entities to use the liquidation basis of accounting when liquidation is "imminent," meaning that (a) there is a remote likelihood that the entity will return from liquidation, and (b) either one of the following conditions also exists:
An authoritative person (or persons) has approved a liquidation plan, and the likelihood that other parties will block the plan's execution is remote. Other forces impose a liquidation plan on the entity (such as under involuntary bankruptcy). If an entity's governing documents specify a liquidation plan, the entity should apply the liquidation basis of accounting only if the approved liquidation plan differs from the liquidation plan specified at the entity's inception.
Under the liquidation basis of accounting, the entity should present its assets at the amount of cash proceeds that it expects to receive from liquidation. Any assets not previously recognized in the U.S. GAAP financial statements should be included if the entity expects to receive proceeds for those assets or to use them to settle liabilities. The entity should continue to recognize liabilities in accordance with U.S. GAAP and to accrue the costs expected to be incurred and the income expected to be earned during liquidation.
The ASU also calls for disclosures about the liquidation plan and the expected duration of the liquidation period, the method and significant assumptions used in measuring the assets and liabilities, and the types and amounts of costs and income accrued.
The new guidance is effective prospectively for entities that determine liquidation is imminent during interim and annual reporting periods beginning after December 15, 2013. Early adoption is permitted. An entity using the liquidation basis of accounting in accordance with other Codification Topics as of the effective date is not required to apply the new guidance; rather, it would continue to apply the guidance in the other Topics until liquidation is complete.
For more information, refer to FASB in Focus, "Accounting Standards Update (ASU) No. 2013-07, Presentation of Financial...