The principles involved in liquidation accounting are likely to receive greater attention as a consequence of recommendations by the Financial Accounting Standards Board. Implementation of liquidation procedures is expected in more instances and earlier than past recognition. Most accountants last considered these details during CPA exam prep. Now, as many companies face the brink of shutdown, CPAs may commonly find themselves following the alternative financial statement requirements for liquidation situations.
Typical accounting rules in CPA study material are designed to deliver financial reports for companies expected to remain in business for the foreseeable future. However, CPAs should change to a different system when conditions are clear that a business will shortly not continue as a going concern.
The FASB has issued an update to the standards followed by companies on the brink of meltdown. The objective is improving the accuracy of information that reflects impending liquidation. No impact is expected on the methods for liquidation accounting described in CPA courses. Instead, the FASB simply proposes that CPAs follow the process immediately when liquidation is imminent. This stage is defined when management authority has approved a plan of liquidation or a plan is already imposed. For example, such conditions might exist as a result of action in bankruptcy court.
When following the recommended path for liquidation accounting, a company’s financial statements reveal relevant information about the organization’s resources and obligations. This is described in courses for CPA certification as presenting assets and liabilities in terms of how much cash a company reasonably expects to collect or pay when shutting down. Financial reports should also convey the liquidation plan, assumptions used to measure assets and liabilities, the expected duration of liquidation, and the cost of liquidating.
The commercial life for some entities is limited by governing documents. Simple management decisions dictate when liquidation is imminent. An example is a real estate development company created specifically for a single project. However, a growing number of liquidation cases are companies on the verge of bankruptcy. Even in the absence of a filing with the bankruptcy court, an entity may face only a remote possibility of averting liquidation. These are the instances that concern the FASB.
Accountants should remain alert to situations where a company’s operations are significantly curtailed. When entire business segments have ceased and appear unlikely to reemerge, an evaluation of accounting changes is warranted. This is the only process for conveying an accurate depiction of financial condition to lenders and outside shareholders.
Hence, liquidation accounting is not an arcane matter to forget after learning it during CPA exam study. Rather, this is a relevant technique to deploy for every entity that has begun to carry out liquidation arrangements. In that event, a CPA must assure that values are adjusted for assets and liabilities as well as provide a description of the methods used to reach the restated values.
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