Liquidation Basis of Accounting. A Guide to its Relevance & Application

Transcription

1 Liquidatin Basis f Accunting A Guide t its Relevance & Applicatin

2 Surces Authritative Surces Used PPC s Guide t Preparing Financial Statements: Sectin 1906, Entities That Have Elected Liquidatin FASB Update : Tpic 205, Presentatin f Financial Statements- Liquidatin Basis f Accunting 2

3 When Des It Apply? When des it becme necessary fr an entity t prepare financial statements in accrdance with the Liquidatin Basis f Accunting (LBOA) in rder t be GAAP-cmpliant? 3

4 When Des It Apply? When Liquidatin is IMMINENT. As stated in Tpic 205, Presentatin f Financial Statements-Liquidatin Basis f Accunting, FASB update N , clause : an entity shall prepare financial statements in accrdance with the requirements f this Subtpic when liquidatin is imminent unless the liquidatin fllws a plan fr liquidatin that was specified in the entity s gverning dcuments at the entity s inceptin. 4

5 When Des it Apply? When is liquidatin deemed imminent, in turn, triggering the need fr measurement under LBOA? 5

6 When Des it Apply? When a plan f liquidatin has been APPROVED OR IMPOSED. As stated in Tpic 205, Presentatin f Financial Statements-Liquidatin Basis f Accunting, FASB update N , clause : liquidatin is imminent when EITHER f the fllwing ccurs: A plan fr liquidatin has been apprved by the persn r persns with the authrity t make such a plan effective AND the likelihd is remte that any f the fllwing will ccur: executin f the plan will be blcked by ther parties (fr example, thse with sharehlder rights) and entity will return frm liquidatin A plan fr liquidatin is impsed by ther frces (fr example, invluntary bankruptcy) and the likelihd is remte that the entity will return frm liquidatin. 6

7 When Des it Apply? 7

8 When Des It Apply? What is the purpse fr this distinct measurement? 8

9 Why Apply It? T present a MORE RELEVANT financial psitin. Presentatins f assets and liabilities at their histrical bases are n lnger relevant t liquidating entities, and therefre, financial statements f liquidating entities are adjusted t reflect amunts expected in liquidatin. This translates int measuring assets at net realizable value (NRV) and liabilities at net settlement value (NSV). 9

10 Why Apply It? T present ONLY RELEVANT financial statements. As stated in , there is n authritative guidance n the presentatin f financial statements f a liquidating entity. Hwever, the financial statement references in the sample auditrs reprts in Interpretatin 1 at AU-C imply that the statements f results f peratins and cash flws presented fr a ging cncern are unnecessary. While financial psitin certainly is relevant fr liquidating entities, results f peratins and cash flws are nt. Activities cnsist entirely f winding dwn and there is n prfit t reprt, nly changes in estimated values. [Nte: As stated in , At the end f each reprting perid, estimated values shuld be changed based n available infrmatin, and the changes shuld flw thrugh net incme. ] 10

11 Hw t Apply It-General Suggested Financial Statements: Pre & Pst Date f Liquidatin As stated in , when deciding which statements t present fr the year in which the cnversin ccurs, the authrs recmmend preparing the fllwing statements fr and as f the reprting perids, as fllws: 1/1/12-Date f Liquidatin Statements f Incme & Retained Earnings AND Statement f Cash Flws Date f Liquidatin-12/31/12 Statement f Changes in Net Assets in Liquidatin Date f Liquidatin-12/31/12 Statement f Net Assets in Liquidatin 11

12 Hw t Apply It-General Asset Valuatin Measured at Net Realizable Value. Net realizable value is generally equal t the selling price less the selling csts (cmpletin and dispsal). It is expected sales price less selling csts (e.g. repair and dispsal csts). Since third-party fees, such as finder s fees fr dispsing f equipment, brkerage fees, and cllectin agency fees, are ften required in a liquidatin, they shuld be cnsidered in the estimates. In the United States, a finder's fee is the cmpensatin given t an intermediary in a business transactin. Usually, there is a causal relatinship between the ne party and the intermediary (the finder), anther relatinship between the finder and the secnd party, and the tw parties f the transactin wuld nt have met if it weren't fr the wrk f the finder. Such cmpensatin is cmmn in business and is regulated by cntractual agreements and law in the United States. A finder's fee can als be a gift frm ne party f the transactin, wh feel mrally bligated that the prfits f the transactin be shared with the finder fr making that transactin pssible. 12

13 Hw t Apply It-General Liabilities Valuatin Measured at Net Settlement Value. Estimating the settlement amunts requires judgment, but cnsulting with lawyers and thers wh have wrked with liquidating entities nrmally prvides useful infrmatin. 13

14 Hw t Apply It-General Adjustments t Estimates Estimates are rarely perfect and changes in estimated values ccur. Thse changes shuld be recgnized when management becmes aware f them instead f when they are realized. At the end f each reprting perid, estimated values shuld be changed (if necessary) based n available infrmatin, and the changes shuld flw thrugh net incme. 14

15 Hw t Apply It-Specific Accunts r Transactins Equipment Often, used markets d n exist fr specialized equipment, and a liquidating entity s nly alternative may be t sell the equipment t anther entity in the same industry. If the number f ptential buyers is small enugh, selling the equipment during the liquidatin perid may nt be pssible, and selling fr scrap value may be necessary. 15

16 Hw t Apply It-Specific Accunts r Transactins Differences frm Ging Cncern GAAP t LBOA GAAP by Area Assets Liabilities Net Assets Presentatin is in rder f realizability (frm assets expected t be realized snest t latest) c. N distinctin between current and nn-current assets b. Presentatin is in rder expected t be settled (frm liabilities expected t be settled snest t latest) c. N distinctin between current and nn-current assets b. There is n use f cnventinal equity titles; rather use ne f tw titles: 1) Net Assets In Liquidatin r 2) Deficiency in Net Assets d. 16