In brief: FASB finalizes guidance for applying liquidation basis of accounting (No. 2013-22)

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In brief 04/23/2013 by Assurance services
In brief: FASB finalizes guidance for applying liquidation basis of accounting (No. 2013-22)

At a glance

On April 22, the FASB issued Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The new standard addresses when and how an entity should apply the liquidation basis of accounting. This In brief article provides an overview of the key provisions of the new standard.

What's new?

On April 22, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. This guidance addresses when and how an entity should apply the liquidation basis of accounting.

What are the key provisions?

When to apply the liquidation basis of accounting

The standard requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when:

  • 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
  • a plan for liquidation is imposed by other forces, and the likelihood is remote that the entity will return from liquidation.

If a plan for liquidation was specified in an entity's governing documents at its inception (for example, limited-life entities), then liquidation would be imminent only if the approved plan for liquidation differs from the plan specified at the entity’s inception.

Measuring assets and liabilities

An entity applying the liquidation basis of accounting will measure and present assets 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. This includes assets the entity previously had not recognized under U.S. GAAP, but expects to either sell in liquidation or use in settling liabilities (for example, trademarks).

An entity will recognize and measure its liabilities in accordance with U.S. GAAP that otherwise applies to those liabilities. An entity should not anticipate it will be legally released from being the primary obligor under those liabilities, either judicially or by creditors.

An entity will also accrue and separately present the costs it expects to incur and the income it expects to earn during the course of the liquidation, including any costs associated with the disposal or settlement of its assets and liabilities.

Presentation and disclosure

The standard changes 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 standard also requires 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.

Is convergence achieved?

IFRS currently does not provide explicit guidance on when or how to apply the liquidation basis of accounting.

Who's affected?

The standard applies to all entities reporting under U.S. GAAP, except investment companies that are regulated under the Investment Company Act of 1940.

What's the effective date?

The standard is effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Early adoption is permitted.

Questions?

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).

Authored by:

Lawrence N. Dodyk
Partner
Phone: 1-973-236-7213
Email: lawrence.dodyk@us.pwc.com

Cody L. Smith
Partner
Phone: 1-973-236-4299
Email: cody.smith@us.pwc.com

Phillip R. Rossi
Senior Manager
Phone: 1-973-236-4184
Email: phillip.r.rossi@us.pwc.com