Question

When it is considered imninent that a company is no longer a going concern and the company needs to liquidate its assets, under the Liquidation Basis of Accounting, the assets should be valued at

A) original cost

B) Net realizable value (NRV)

C) amount expected to be generated upon liquidation.

D) Fair market value at date liquidation is considered imminent

Answer 1

Q. When it is considered imninent that a company is no longer a going concern and the company needs to liquidate its assets, under the Liquidation Basis of Accounting, the assets should be valued at

Answer: C) amount expected to be generated upon liquidation.

Explanation:

Liquidation basis of accounting

Liquidation basis accounting is concerned with preparing the financial statements of a business in a different way if its liquidation is considered to be imminent. Imminent refers to one of the following two conditions:

• Liquidation plan. A plan for liquidation has been approved, and is likely to be achieved.
• Forced liquidation. A third party is forcing the business into liquidation, and is likely to achieve this goal.

The accounting under the liquidation basis of accounting differs in several respects from normal accrual basis accounting. The key differences are:

• Recognize any assets that had not previously been recognized, but which you expect to either sell in liquidation or use to pay off liabilities. This means it is possible to recognize internally generated intangible assets – which would not normally be the case. The main point is to only recognize items if they are actually worth something in liquidation.
• It is allowable to recognize in aggregate those assets that had not been previously recognized, rather than individually.
• Accrue for the expected disposal costs of assets that will be liquidated.
• Accrue for those income and expense items that will be earned or incurred through the end of the expected liquidation period. An example of such an income item is the expected profits from orders that have not yet been fulfilled. An example of such an expense item is wage and salary costs expected to be incurred.

In liquidation accounting, assets are measured at the estimated amount for which they can be sold – which may or may not be their fair market value. If the liquidation is rushed, this could mean that the estimated selling price is less than fair market value.