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.
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:
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:
IFRS currently does not provide explicit guidance on when or how to apply the liquidation basis of accounting.
The standard applies to all entities reporting under U.S. GAAP, except investment companies that are regulated under the Investment Company Act of 1940.
The standard is effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Early adoption is permitted.
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
Cody L. Smith
Phillip R. Rossi