ASC

ASC 205-30

Liquidation Basis of Accounting

205 Presentation of Financial Statements

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In brief

IntermediatePresentationFinancial statement presentationSubsequent measurementDisclosure

ASC 205-30 tells an entity when it must abandon going-concern accounting and switch to the liquidation basis, how to measure assets and liabilities under that basis, and what to disclose. The trigger is that liquidation is "imminent" (205-30-25-1 and 25-2), unless the liquidation follows a plan specified in the entity's governing documents at inception. Under the liquidation basis, assets are measured at the estimated cash or other consideration expected to be collected, previously unrecognized items such as trademarks are recognized, expected disposal costs and income/expenses through the end of liquidation are accrued (undiscounted), and the entity presents a statement of net assets in liquidation and a statement of changes in net assets in liquidation.

Key points (7)
  • Liquidation basis is required when liquidation is imminent, unless the liquidation follows a plan for liquidation specified in the entity's governing documents at inception (205-30-25-1); investment companies regulated under the Investment Company Act of 1940 are scoped out and the exception may not be applied by analogy (205-30-15-1).
  • Liquidation is imminent when a plan is approved by those with authority to make it effective and the likelihood is remote both that other parties will block it and that the entity will return from liquidation, or when a plan is imposed by other forces such as involuntary bankruptcy and return from liquidation is remote (205-30-25-2).
  • An inception-specified plan is presumed not to be followed if the entity is forced to dispose of assets for consideration not commensurate with fair value; other deviations matter only to the extent they affect whether consideration is commensurate with fair value (205-30-25-3).
  • Assets are measured at the estimated amount of cash or other consideration expected to be collected in settling or disposing of them, which cannot be presumed to equal fair value for all assets (205-30-30-1), and previously unrecognized items expected to be sold or used to settle liabilities (e.g., trademarks) are recognized, possibly in the aggregate (205-30-25-4).
  • Liabilities continue to be recognized and measured under other applicable Topics (including 405-20-40-1), adjusted for changed assumptions such as payment timing, but the entity shall not anticipate being legally released as primary obligor (205-30-25-5; 205-30-30-2).
  • Estimated disposal costs are accrued and presented in the aggregate separately from the related assets, and expected costs and income through the end of liquidation are accrued when reasonably estimable; neither accrual is discounted (205-30-25-6; 25-7; 205-30-30-3), and all amounts are remeasured at each reporting date (205-30-35-1).
  • The entity must present at a minimum a statement of net assets in liquidation and a statement of changes in net assets in liquidation, applied prospectively from the day liquidation became imminent (205-30-45-1; 45-2), and disclose the basis and circumstances of adoption, the liquidation plan and expected completion date, measurement methods and significant assumptions, and accrued costs and income (205-30-50-2).

For students. This is the one place in GAAP where the going-concern measurement model is replaced wholesale, so exams focus on the "imminent" trigger and the two required statements. Common misunderstandings: assuming liquidation-basis asset amounts equal fair value (they are expected collectible consideration, which may differ), forgetting that liabilities still follow their own Topics and cannot be reduced for anticipated legal release, and discounting the disposal-cost and expected income accruals.

liquidation basis of accountingliquidation is imminentplan for liquidationstatement of net assets in liquidationstatement of changes in net assets in liquidationexpected collectible considerationaccrued disposal costspreviously unrecognized assets

Machine-generated study aid for ASC 205-30. Check the source paragraphs below.

205-30-00Status

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205-30-05Overview and Background

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205-30-05-1
The Liquidation Basis of Accounting Subtopic provides guidance on when and how an entity should prepare its financial statements using the liquidation basis of accounting and describes the related disclosures that should be made.

205-30-15Scope and Scope Exceptions

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205-30-15-1
The guidance in this Subtopic applies to all entities except for investment companies regulated under the Investment Company Act of 1940. Other entities shall not apply this scope exception by analogy.

205-30-25Recognition

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205-30-25-1
An entity shall prepare financial statements in accordance with the requirements of this Subtopic when liquidation is imminent unless the liquidation follows a plan for liquidation that was specified in the entity's governing documents at the entity's inception.
205-30-25-2
Liquidation is imminent when either of the following occurs:
  1. a
    A plan for liquidation has been approved by the person or persons with the authority to make such a plan effective, and the likelihood is remote that any of the following will occur:
    1. 1
      Execution of the plan will be blocked by other parties (for example, those with shareholder rights)
    2. 2
      The entity will return from liquidation.
  2. b
    A plan for liquidation is imposed by other forces (for example, involuntary bankruptcy), and the likelihood is remote that the entity will return from liquidation.
205-30-25-3
An entity shall presume that its plan of liquidation does not follow a plan that was specified in the entity's governing documents at its inception if the entity is forced to dispose of its assets in exchange for consideration that is not commensurate with the fair value of those assets. Other aspects of the entity's plan of liquidation also might differ from a plan that was specified in the entity's governing documents at its inception (for example, the date at which liquidation shall commence). However, those factors should be considered in determining whether to apply the liquidation basis of accounting only to the extent that they affect whether the entity expects to receive consideration in exchange for its assets that is not commensurate with fair value.
205-30-25-4
When using the liquidation basis of accounting, an entity shall recognize other items that it previously had not recognized (for example, trademarks) but that it expects to either sell in liquidation or use to settle liabilities. Those items may be recognized in the aggregate.
205-30-25-5
An entity shall recognize liabilities in accordance with the recognition provisions of other Topics that otherwise would apply to those liabilities, including paragraph 405-20-40-1.
205-30-25-6
An entity shall accrue estimated costs to dispose of assets or other items that it expects to sell in liquidation and present those costs in the aggregate separately from those assets or items.
205-30-25-7
An entity shall accrue costs and income that it expects to incur or earn (for example, payroll costs or income from preexisting orders that the entity expects to fulfill during liquidation) through the end of its liquidation if and when it has a reasonable basis for estimation.

205-30-30Initial Measurement

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205-30-30-1
An entity shall measure assets to reflect the estimated amount of cash or other consideration that it expects to collect in settling or disposing of those assets in carrying out its plan for liquidation. In some cases, fair value may approximate the amount that an entity expects to collect. However, an entity shall not presume this to be true for all assets.
205-30-30-2
An entity shall measure liabilities in accordance with the measurement provisions of other Topics that otherwise would apply to those liabilities (excluding the accrual of estimated disposal costs as described in paragraph 205-30-25-6 and expected income and expenses as described in paragraph 205-30-25-7). In applying those other Topics, an entity shall adjust its liabilities to reflect changes in assumptions that are a result of the entity's decision to liquidate (for example, timing of payments). However, an entity shall not anticipate being legally released from being the primary obligor under a liability, either judicially or by the creditor.
205-30-30-3
An entity shall not apply discounting provisions in measuring the accruals for estimated disposal costs in accordance with paragraph 205-30-25-6 and expected income and expenses in accordance with paragraph 205-30-25-7.

205-30-35Subsequent Measurement

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205-30-35-1
At each reporting date, an entity shall remeasure its assets and other items it expects to sell that it had not previously recognized (for example, trademarks), liabilities (if required under the relevant Topic for those liabilities), and the accruals of disposal or other costs or income to reflect the actual or estimated change in carrying value since the previous reporting date in accordance with paragraphs
205-30-30-1 through 30-3
.

205-30-45Other Presentation Matters

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205-30-45-1
At a minimum, an entity that applies the liquidation basis of accounting shall prepare the following:
  1. a
    A statement of net assets in liquidation
  2. b
    A statement of changes in net assets in liquidation.
205-30-45-2
The liquidation basis of accounting shall be applied prospectively from the day that liquidation becomes imminent. The initial statement of changes in net assets in liquidation shall present only changes in net assets that occurred during the period since liquidation became imminent.

205-30-50Disclosure

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205-30-50-1
An entity shall make all disclosures required by other Topics that are relevant to understanding the entity's statement of net assets in liquidation and statement of changes in net assets in liquidation. The disclosures shall convey information about the amount of cash or other consideration that an entity expects to collect and the amount that the entity is obligated or expects to be obligated (in the case of the accruals described in paragraphs
205-30-25-6 through 25-7
) to pay during the course of liquidation.
205-30-50-2
At a minimum, an entity shall disclose all of the following when it prepares financial statements using the liquidation basis of accounting:
  1. a
    That the financial statements are prepared using the liquidation basis of accounting, including the facts and circumstances surrounding the adoption of the liquidation basis of accounting and the entity's determination that liquidation is imminent.
  2. b
    A description of the entity's plan for liquidation, including a description of each of the following:
    1. 1
      The manner by which it expects to dispose of its assets and other items it expects to sell that it had not previously recognized as assets (for example, trademarks)
    2. 2
      The manner by which it expects to settle its liabilities
    3. 3
      The expected date by which the entity expects to complete its liquidation.
  3. c
    The methods and significant assumptions used to measure assets and liabilities, including any subsequent changes to those methods and assumptions.
  4. d
    The type and amount of costs and income accrued in the statement of net assets in liquidation and the period over which those costs are expected to be paid or income earned.

205-30-55Implementation Guidance and Illustrations

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Illustrations

205-30-55-1
The following Examples illustrate how an entity would determine when it should apply the liquidation basis of accounting. The Examples are not intended to capture every scenario under which an entity might have to apply the liquidation basis of accounting.
205-30-55-2
Entity A is a manufacturer of goods. In 20X3, Entity A began experiencing financial difficulty because of declining market demand for its goods. On September 19, 20X3, Entity A's board of directors approved a plan for liquidation. The board of directors had the authority to make the plan effective. There were no other parties that could block the execution of the plan, and the likelihood that the entity would return from liquidation was remote. Entity A should begin applying the liquidation basis of accounting as of September 19, 20X3, which is the date that Entity A's board of directors approved the plan for liquidation.
205-30-55-3
The governing documents from Entity B's inception specified that its contractual life would end in Year 10. On March 11 of Year 6, Entity B's board of directors determined that the entity would not be able to meet its debt obligations and voted to begin liquidating the entity earlier than planned. Entity B required approval from Entity C, a third party, to make its plan of liquidation effective. Entity B obtained approval from Entity C on April 10 of Year 6. No other parties could block the execution of the plan of liquidation, and the likelihood that Entity B would return from liquidation was remote. Under the plan of liquidation, Entity B anticipated that it would not have sufficient time to sell its assets in exchange for consideration that would approximate the fair value of those assets. Entity B should begin preparing its financial statements using the liquidation basis of accounting as of April 10 of Year 6, which is the date that the entity had obtained all of the approvals required to make its plan of liquidation effective.

205-30-65Transition and Open Effective Date Information

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205-30-65-1
Paragraph superseded on 01/05/2016 after the end of the transition period stated in Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.

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