The challenge of liquidation basis of accounting

A liquidation may present several obstacles to be navigated by the organization, one such obstacle being the accounting. The proper application of Liquidation Basis of Accounting (LBOA) within financial statements can be quite challenging. The goal behind LBOA is to report the amount that an investor may expect to receive after the completion of the liquidation process. The key objective for management is to communicate to the individual investor what the overall impact of liquidation will be.

The Financial Accounting Standards Board (FASB) addresses this in Accounting Standards Codification (ASC) 205-30, Liquidation Basis of Accounting, which is primarily based on Accounting Standards Update (ASU) 2013-07 Topic 205, Presentation of Financial Statements – Liquidation Basis of Accounting. LBOA is used to comply with U.S. generally accepted accounting principles (GAAP) when applicable situations present themselves.

When liquidation basis of accounting is used

LBOA is used when liquidation is imminent and no plan was specified in the governing documents. The question arises as to when liquidation would be considered imminent in the eyes of FASB. Per ASC 205-30-25-2, it is considered imminent when either of these occur:

• “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:
• 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.”
• Execution of the plan will be blocked by other parties (for example, those with shareholder rights) or
• The entity will return from liquidation.

Determining if LBOA should be applied

There are a few basic questions that need to be answered in determining if LBOA should be applied to conform to GAAP presentation based on liquidation being considered imminent.

Is the entity is considered a “limited-life” entity? This would be if at inception the entity was defined as to when it would enter liquidation.