New FASB rules standardize liquidation reporting

A new FASB standard released Monday provides guidance for organizations on when and how to prepare financial statements using the liquidation basis of accounting.

Accounting Standards Update (ASU) 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, describes how financial statements must be prepared by a company that is converting its assets to cash or other assets, and is settling its obligations with creditors with the intent of ceasing its activities.

In these circumstances, financial statements must be prepared using a basis of accounting that helps financial statement users understand how much the organization will have available to distribute to investors after disposing of its assets and settling its obligations.

FASB Chairman Leslie Seidman said in a news release that the standard will reduce diversity in practice and addresses the concerns of stakeholders who had asked for guidance from FASB.

Organizations will be required under the new standard to use the liquidation basis for preparing financial statements when liquidation is “imminent.” Liquidation is considered imminent when there is only a remote likelihood that the organization will return from liquidation, and one of the following conditions is true:

• A plan for liquidation is approved by the relevant organization officials, and the likelihood that the plan will be blocked by other parties is considered remote.
• A plan for liquidation is being imposed by other forces, as in an involuntary bankruptcy.

When liquidation was specified in an organization’s governing documents at inception (as in a limited-life entity), the liquidation basis should be used only if the liquidation plan differs from the original terms.

Financial statements prepared using the liquidation basis will be required to include:

• The organization’s assets, described in terms of the amount of expected cash proceeds from liquidation. This would include assets that had not previously been recognized but that the organization expects to sell in liquidation or use in settling liabilities. Trademarks would be an example of such assets.
• The organization’s liabilities. The standard does not allow organizations to anticipate that they will be released from payment of those liabilities.
• Accrual of the costs the organization expects to incur and the income it expects to earn during liquidation, including disposal costs that may be anticipated.

The standard applies to public and private companies as well as not-for-profit organizations. The ASU takes effect for interim and annual reporting periods beginning after Dec. 15, 2013, and early adoption is permitted.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.