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Journal Entry — Liquidation Basis of Accounting — Final Standard Expected Soon

Published on: Feb 15, 2013

At its meeting this week, the FASB discussed various aspects of its proposed standard on the liquidation basis of accounting, including (1) scope, (2) recognition and measurement, (3) presentation and disclosure requirements, (4) transition and effective date, and (5) next steps.


The FASB tentatively decided that public and nonpublic entities would apply the proposed guidance but that investment companies regulated under the Investment Company Act of 1940 would not be within its scope.

Recognition and Measurement

The proposed ASU requires entities to measure their assets and liabilities at the amount of consideration they expect to receive or pay. However, upon further deliberation, the Board tentatively agreed that entities should continue to use existing U.S. GAAP (as opposed to the liquidation basis measurement principles) to measure their liabilities. The Board further clarified that entities should reassess the inputs used in existing valuation models or methods to estimate the value of their liabilities when they adopt the liquidation basis of accounting (e.g., discount rate, factors triggering a pension plan curtailment); however, the Board also noted that “the entity should not anticipate legal release.” The FASB therefore tentatively agreed that the measurement guidance in the final standard would only be applied to assets and accruals for expected income and expenses.

The FASB also tentatively agreed that entities should record all assets they expect to sell, including previously unrecognized assets (e.g., internally developed trademark, patent). The assets would be recorded separately from revenue entities expect to earn from the assets during the liquidation period. The Board clarified that to the extent that the assets are material to liquidation basis accounting, they would be presented in a separate line on the statement of net assets but that entities would not have to further disaggregate them (e.g., by trademark). The Board also clarified that presentation of the assets would not be net of estimated disposal costs.

Presentation and Disclosure Requirements

The Board noted that entities would need to comply with the disclosure requirements under the proposed ASU as well as those under other U.S. GAAP that would be relevant to the liquidation.

The proposed ASU requires an entity to prepare its financial statements when liquidation is imminent. The FASB also tentatively agreed to clarify in the final standard’s Basis for Conclusions that an entity is not required to present “information about any of its activities” before adopting the liquidation basis. In other words, in the first reporting period after deeming that liquidation is imminent, an entity would disclose a statement of change in net assets from the date the liquidation was deemed imminent to the period end.

Transition and Effective Date

The FASB tentatively agreed that entities would adopt the guidance on “the date when liquidation became imminent.” Entities that already present their financial statements on a liquidation basis of accounting when the standard is finalized would record a cumulative catch-up adjustment upon adoption.

The Board tentatively agreed that the final standard would be effective for entities adopting the liquidation basis of accounting in periods beginning after December 15, 2013. Early adoption would be permitted.

Next Steps

The Board directed the staff to draft a final ASU, which it expects to issue by late March or early April 2013.

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