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Tax & Assurance Guidance

Liquidation Basis of Accounting

Posted on August 15, 2012 by

Dave Van Damme

Dave Van Damme

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Prior to the FASB recently issuing the proposed Accounting Standards Update (ASU), minimal guidance was present to apply The Liquidation Basis of Accounting. Consequently, there is diversity in the presentation of liquidation basis financial statements. The lack of guidance and diversity in practice  were growing concerns of the FASB. Therefore, the proposed ASU clarifies when and how an entity should present  liquidation basis financial statements.

An entity must prepare its financial statements using the liquidation basis when liquidation is imminent. Liquidation is “imminent” when:

  • A plan for liquidation has been approved by the person with authority to do so, and it is unlikely the plan will be blocked by outside sources
  • Liquidation is imposed by another force (example: involuntary bankruptcy), and it is unlikely the entity will return from liquidation

Other things to note:

  • Assets and liabilities must be presented in the financial statements at the cash or consideration level expected to be received or paid
  • Income and costs incurred during the liquidation period must be presented separately
  • The update will also touch on; methods to measure assets and liabilities, types of income and costs accrued, duration of liquidation, and much more

The FASB firmly believes that this update will improve the consistency and comparability of financial reporting. The comment period ends for this proposed ASU on October 1, 2012.

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Dave Van Damme

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Leading the firm's advisory & assurance group, Dave supports closely held businesses with audits, financial reporting and fraud analysis.

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