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F10-68 DeVry/Becker Educational Development Corp. All rights reserved.

Financial 10 Becker Professional Education | CPA Exam Review

L I Q U I D A T I O N B A S I S O F A C C O U N T I N G

The Liquidation Basis of Accounting topic is testable beginning January 1, 2014.

I. PRESENTATION OF FINANCIAL STATEMENTSLiquidation Basis of Accounting

When liquidation is imminent, an entity must prepare its financial statements using the liquidation

basis of accounting. This requirement applies to public and private companies and not-for-

profit organizations. The liquidation basis is applied prospectively at the time liquidation is

deemed imminent.

The following entities are within the scope of this requirement:

(i) Entities which are in bankruptcy and are expected to liquidate.

(ii) Benefit plans which are terminated by their sponsors.

(iii) Limited-life entities that are not following the preestablished liquidation plan from the entity's

inception, which results in the entity not receiving fair value for its assets. If a limited life entity

is following its preestablished plan, liquidation basis does not apply.

A. Criteria for Imminent Liquidation

Generally, a company is in liquidation when it is converting its assets to cash or other assets

and is settling its obligations with creditors with the intent of ceasing its activities. 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.

In order for liquidation to qualify as "imminent," the following criteria must be met:

1. The likelihood of the entity returningfrom liquidation is remote; and

2. Either:

a. A liquidation plan is approved by the individual(s) who have the authority to make

the plan effective and the likelihood is remote that the plan's execution will be

blocked by other parties; or

b. A liquidation plan is imposed by other forces, such as an involuntary bankruptcy.

B. Measuring Assets, Liabilities, and Accruals

On the effective date that the liquidation basis must be applied, a cumulative-effect

adjustment is required to account for any differences between existing measurements and

the measurements required under the liquidation basis. At each subsequent reporting date,

assets, liabilities, and accruals must be remeasured.

1. Assets

Assets must be measured and presented at the amount of cash proceeds expected

from liquidation. While fair value may be an approximate estimate for some assets, this

should not be assumed to be the case for all assets, because they may not be disposed

of in an orderly manner. Also, any items that were not previously recognized under U.S.

GAAP (e.g., trademarks and patents) but are expected to be sold in liquidation or used in

settling liabilities should be recognized (either individually or in aggregate).

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