On July 2, 2012, the FASB issued a proposal addressing when and how an entity should apply the liquidation basis of accounting. The proposal would require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is "imminent," as defined in the proposal. This In brief article provides an overview of the FASB's proposal.
On July 2, 2012, the Financial Accounting Standards Board (FASB) issued a proposal addressing when and how an entity should apply the liquidation basis of accounting.
The proposal would require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when:
If a plan for liquidation was specified in an entity's governing documents at its inception (for example, limited-life entities), then liquidation is imminent when significant management decisions about furthering the ongoing operations of the entity have ceased or they are substantially limited to those necessary to carry out a plan of liquidation other than the plan specified at the inception of the entity.
An entity applying the liquidation basis of accounting would measure and present assets and liabilities in its financial statements at the estimated amount of cash or other consideration that it expects to collect, or expects to pay to settle its obligations, during the course of liquidation. An entity would be required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the course of the liquidation, including any costs associated with the disposal or settlement of its assets and liabilities.
The proposal would change the form of the financial statements for an entity using the liquidation basis of accounting to a statement of net assets in liquidation and a statement of changes in net assets in liquidation. The proposal would also require disclosures about the entity's plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation.
IFRS currently does not provide explicit guidance on when and how to apply the liquidation basis of accounting.
The proposal would apply to an entity reporting under U.S. GAAP when it determines that liquidation is imminent.
The FASB will consider constituent feedback before establishing an effective date. The proposed changes would be effective as of the beginning of the annual period of adoption and applied prospectively from the day that liquidation becomes imminent. Early adoption would be permitted.
Comments on the FASB's proposal are due October 1, 2012.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact members of the Business Combinations team in the National Professional Services Group (1-973-236-7801).
Lawrence N. Dodyk
Phillip R. Rossi
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