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Journal entry — Liquidation basis of accounting — Recognition and measurement

Published on: Dec 13, 2012

At its meeting yesterday, the FASB discussed potential improvements to the recognition and measurement principles in its proposed ASU1 on the liquidation basis of accounting.


The proposed ASU requires an entity to apply the liquidation basis of accounting when liquidation is deemed imminent. The Board tentatively decided to change the definition of “imminent.” Under the new definition, liquidation is imminent when there is an “approval of a plan of liquidation” (or when a liquidation plan has been imposed on the entity). To eliminate the need for two definitions (i.e., one for limited-life entities and one for non-limited-life entities, as currently proposed), the Board tentatively agreed that an entity should use the liquidation basis only when the liquidation is “unplanned.” Although it did not define this term, the Board explained that it does not intend limited-life entities to apply the liquidation basis of accounting unless the liquidation date is unplanned (e.g., the governing documents of a limited-life entity indicate that its life is 10 years but the entity has to be liquidated after two years).


The Board tentatively agreed to clarify the proposed requirement under which entities applying the liquidation basis of accounting must accrue all expected future income and costs that they will incur during liquidation provided that they have a reasonable basis for estimating these amounts. This clarification is intended to address concerns that certain future income or costs may not be estimated because of (1) the nature or type of these costs or (2) an anticipated long liquidation period.

The proposed ASU requires entities to measure their assets and liabilities at the amount of consideration they expect to receive or pay. The Board tentatively agreed to clarify that if the expected consideration to be collected approximates the fair value of the asset, the entity may measure the asset at fair value. After making this tentative decision, the Board requested the staff to perform additional research and bring back suggestions to address how the proposed measurement principles related to the liquidation basis of accounting interact with other specific measurement bases that entities may need to use in presenting their asset and liabilities in accordance with certain statutory reporting requirements (e.g., fair value, which may not represent the cash flows an entity expects to collect or pay). Further, the Board tentatively decided that an entity should record its contractual liabilities at the contractual amount and should subsequently adjust these amounts when the liability is forgiven, relieved, or settled. The Board agreed to discuss the measurement of noncontractual liabilities (e.g., legal or environmental accruals accounted for in accordance with ASC 4502) at a later date.


[1] FASB Proposed Accounting Standards Update, The Liquidation Basis of Accounting.

[2] FASB Accounting Standards Codification Topic 450, Contingencies.

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