Liquidation basis of accounting definition
/What is the Liquidation Basis of Accounting?
Liquidation basis accounting is concerned with preparing the financial statements of a business in a different way if its liquidation is considered to be imminent. “Imminent” refers to either of the following two conditions:
Liquidation plan. A plan for liquidation has been approved, and is likely to be achieved.
Forced liquidation. A third party is forcing the business into liquidation, and is likely to achieve this goal.
In liquidation accounting, assets are measured at the estimated amount for which they can be sold – which may or may not be their fair market value. If the liquidation is rushed, this could mean that the estimated selling price is less than fair market value.
It is not permissible to anticipate a release from a liability that has not yet occurred. Instead, continue to recognize the liability until such time as an actual release has been confirmed.
Do not discount disposal costs to their present value. Also, there is no discounting of accrued income. There is no real point in doing so, since the business will presumably be liquidated so soon that the amount of any discount would be immaterial.
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The Difference Between Liquidation Basis and Accrual Basis Accounting
The accounting under the liquidation basis of accounting differs in several respects from normal accrual basis accounting. The key differences are:
Additional asset recognition. Recognize any assets that had not previously been recognized, but which you expect to either sell in liquidation or use to pay off liabilities. This means it is possible to recognize internally generated intangible assets – which would not normally be the case. The main point is to only recognize items if they are actually worth something in liquidation.
Aggregate asset recognition. It is allowable to recognize in aggregate those assets that had not been previously recognized, rather than individually.
Charge off disposal costs. Accrue for the expected disposal costs of assets that will be liquidated.
Accrue future items. Accrue for those income and expense items that will be earned or incurred through the end of the expected liquidation period. An example of such an income item is the expected profits from orders that have not yet been fulfilled. An example of such an expense item is wage and salary costs expected to be incurred.
Liquidation Basis Financial Statements
Under the liquidation basis of accounting, a business must issue two new statements, which are noted below.
Statement of net assets in liquidation. The statement of net assets in liquidation shows the net assets available for distribution at the end of the reporting period.
Statement of changes in net assets in liquidation. The statement of changes in net assets in liquidation shows the changes in net assets during the reporting period.