Applying liquidation basis accounting for a company ceasing operations
Financial statements typically are presented on a going concern basis of accounting, which presumes under standard assumption that a company will continue its operations for the foreseeable future. However, when anticipated that a company will cease operations and liquidate its assets, the liquidation basis of accounting is required. Although seemingly a straightforward indicator, there are exceptions and scope limitations, including a number that relate to investment companies.
First, investment companies regulated under the Investment Company Act of 1940 are scoped out of the guidance and should not apply liquidation basis of accounting.
Second, liquidation basis of accounting should not be used when the company is following a liquidation plan that was specified in the governing documents at inception. This is commonly applicable to term and target term funds that estimate an investment horizon and predefined end date or fixed lifespan.
When should a closed-term fund apply the liquidation basis of accounting?
However, should situations arise where a closed-term fund is forced to liquidate assets in exchange for consideration that is not commensurate with the fair value of those assets (e.g., a “fire-sale”), then the liquidation basis of accounting should be applied. The following decision tree can be used as a resource for determining if the liquidation basis of accounting should be applied:
When applicable, liquidation basis of accounting should be applied prospectively from the day the liquidation becomes imminent and historical financial statements are not adjusted. Application is not considered a policy election and is required.
For questions and considerations over liquidation basis of accounting, consult your Keiter Opportunity Advisor.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
