If liquidation is imminent for an entity, then a company must use the liquidation basis of accounting. The rules for the liquidation basis of accounting were set forth in AS U 2013- 07 and subsequently incorporated into the codification.
When the FASB was deliberating on the issue of the liquidation basis of accounting, the board addressed when the entity should start applying liquidation accounting. Originally, prior to issuing an exposure draft, FASB had decided that liquidation would be considered imminent when the plan for liquidation had been approved by the parties that had the authority to do so.
1. What problem did FASB discover with this approach? What did it then conclude should be done? Later, FASB issued an exposure draft on the liquidation basis of accounting. Many of the respondents to the exposure draft expressed a concern with the definition of “imminent.”
2. What concern did the respondents express? What was the board’s response? Other issues related to the liquidation basis of accounting involve the measurement bases used. The recognition bases under liquidation accounting are generally inconsistent with the measurement used in general purpose financial statements.
3. How did FASB respond to this contradiction within its own framework? FASB concluded that in measuring assets under the liquidation basis of accounting, the entity should measure the assets based on the amounts it expects to receive.
4. Why did FASB not just state that the measurement should be based on fair value? Is it correct that fair value is the same as the amounts the entity expects to receive in liquidation? FASB also concluded that liabilities should not be written down until the entity is legally released from them.
5. What was FASB’s reasoning for this conclusion?