The Liquidation Basis of Accounting - Coursework Example

? The Liquidation Basis of Accounting The Liquidation Basis of Accounting Introduction The primary objective of the liquidation basis of accounting project is to provide an effective guidance for companies on when and how any given entity should apply the liquidation basis of accounting. According to the US guidance, liquidation basis of accounting is primarily used to provide users of financial statement with the relevant information regarding the resources and obligations of resources by measuring both the assets and liabilities within the financial statements of an entity. Some of the key provisions of the ongoing FASB project include a requirement for entities to prepare their financial statements using liquidation basis of accounting when a liquidation plan has been approved with relevant authorities as well as when a liquidation plan has been imposed by other forces and there is less likelihood that the entity will successfully return from liquidation (North and Wagenen, 2013). On the other hand, the ongoing project seeks to change the financial statement form for entities using the liquidation basis of accounting into a statement of changes in the liquidation net assets. Lastly, the project also require full disclosure of an entity’s liquidation plan, assumptions used in measuring the assets and liabilities, the intended methods, amount of income and costs accrued as well as the expected duration of the liquidation process. This paper describes the FASB’s liquidation basis of accounting project, its history as well as the current status of the project. History and background of the Project The history of the current liquidation basis of accounting project began in 1984 when the Financial Accounting Standards Board released Financial Report Survey by AICPA and illustration of Accounting for Enterprises in Unusual Circumstances and Reporting. In fact, this involved a survey conducted on enterprises, which were reorganized or liquidating. The survey focused on offering a brief review of literatures concerning liquidating and reorganized enterprises. Later in 2007, a there was establishment of a project to this agenda by FASB, aimed at dealing with issues regarding liquidation basis of accounting (AIRA, 2012). Additionally, the project was becoming immediate due to the ongoing concern and the effort by FASB to incorporate AICPA’s Codification of Statements on Auditing Standards AU Section 341. In 2008, FASB offers a draft to establish considerations going concern, and later in 2009, adoption of Accounting Standards Codification contributed through authoritative guidance on ways to deal with constitutes liquidation basis accounting (AIRA, 2012). In July 2012, FASB issued a draft of their proposed accounting standards update titled the Liquidation Basis of Accounting to the Accounting Standards Codification (ASC). Prior to the adoption of the project, ASC, the GAAP used to provide very little guidance regarding what is constituting liquidation basis of accounting as well as how the basis of accounting should be applied to any given entity. The added project to FASB agenda was primarily designed to address both the liquidation basis accounting and going concern issues. Current Status Currently, FASB is making preparations in the project to establish ways of communicating effectively to stakeholders on issues regarding standards-setting activities. They are also making necessary project plans by listing the agendas of the project, thereby making estimates of publication dates by the end of 2013 (North and Wagenen, 2013). FASB is making deterring comments to be made of anticipated period of closure in the next four quarters. They are also holding roundtable meeting and making plans to hold other public forums. Moreover, they are setting standards based on establishment of due process on the procedures, which entail extensive consultation. The project plan is focused on facilitating change due to consultation or other reasons. Furthermore, the project plan entails interconnecting summaries of projects prepared by staff, in a way that offers a description of Boards decision and provision of information. On the other hand, the board is also looking into the project to diversify its scope and look at setting universal standards in adoption of accounting methodologies and communication of the same to the major stake holders. In addition it is also looking at aspects of increasing the effectiveness of management by inclusion of staff prepared project summaries to increase levels of consultation and provide other relevant information. (AIRA,2012). The board has also currently incorporated two approaches of determining the financial position of an organization through the use of going concern and liquidation. The American Institute of Certified Public Accountants (AICPA) concept of going concern is based on the assumption that the business will be in existence to an extent that the full utilization of company’s assets would be realized thereby increases the returns. On the other hand the liquidation basis of accounting is based on the closure of the company and its assets redistributed to describe the financial statement. (Mendlowitz, 2012). Previously the FASB issued a draft on the exposure of going concern to the public which up to now it has attracted much concern and attention. With the growing concern it has the board to use the two aspects of going concern and liquidation separately in determination of financial account. However, recently (As of February 20, 2013), a number of decisions have been reached to help redeliberate on the proposed accounting standards update titled “the presentation of financial statements”. Some of the decisions include recognition of an entity of financial statements using the liquidation basis of accounting. Adoption Implications One adaptation implication of this project is manifested through the decision by the board to provide guidance on recognition and measurement for entity’s assets and accruals of anticipated future income and expenses (North and Wagenen, 2013). Therefore, adaptation of liquidation basis accounting facilities recognition and measurement of liabilities based on requirement of applicable GAAP. Entities are required to apply these requirements through adjustment of their liability balances in a way that depicts changes in assumption of the entity. Moreover, the requirement can be applied in timing liability repayment, though the entity should not expect legal liberation. It can also be used for timing when to dispose the company assets incase of liquidation this therefore would be vital in determining the appropriate time and circumstances under which the management can decide to use liquidation basis of accounting in financial reporting. The adoption of liquidation basis of accounting has also an implication on the employees and the investors as using such information it becomes clear to know incase of liquidation how much they are likely to get from the company (AIRA, 2012). As various accounting regulatory organizations come into existence various aspects are addressed that have impact on the overall performance and management of various businesses. The Liquidation Basis of Accounting is one such aspect that has had an impact on establishment and existence of businesses. Financial reporting is essential in provision of relevant information to the major stake holders to the company or organization. The adoption of liquidation basis of accounting is vital in guiding the decisions and measurements put across by the management to ascertain future viability and profitability of the company. With this information the company can be able to predict the appropriate time for payment of liabilities. On the other hand, the current project will also ensure strict standards to are used and therefore inform decision making at various levels of management. In addition there would be clearly established principles and procedures that would be beneficial to determine the financial position of an organization. However, the introduction of codification standards (in 2009) did not add any other significant authoritative guidance to help address the circumstances in which liquidation basis accounting should be best applied. On the other hand, this guidance focused on circumstances that require appropriate application of liquidation basis accounting. Nevertheless, other ways through are used in offering explicit guidance is offered in application of liquidation basis accounting such as International Financial Reporting Standards. In addition, adaptation implication of liquidation basis accounting contributes to staffs’ understanding on ways through which the entity can apply their previous decisions in the process of recognition and measurement. In fact, this refers to the items of entity that have been recognized earlier as assets and the entity is planning to sell them during liquidation. Furthermore, this adaptation has led to discussion by the board regarding recognition of items in the statement of net assets in liquidation, which are separate from accrual of anticipated income and expenses. In fact, the entity is not expected to deduct estimated disposal cost from the revenue gained through exchange of these items. References Association of Insolvency & Restructuring Advisors AIRA. (2012). Liquidation Basis of Accounting: FASB Proposes Guidance on Topic for Which Little Has Been Written. AIRA Journal, 26(3): p. 4-22. Mendlowitz. E. ( 2012). Carousel of Progress. Journal of Accountancy American Institute of Certified Public Accountants. North B., Wagenen, L. (2013). Project Update: The Liquidation Basis of Accounting. Financial Accounting Standards Board. Retrieved from:http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176160506576   North B., Wagenen, L. (2013). Current Technical Plan and Project Updates. Financial Accounting Standards Board. Retrieved from: http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1218220137074 William. H. ( 2011). Going-Concern Assumption: Its Journey into GAAP. The CPA Jornal: 26–28. Annotated Bibliography North B., Wagenen, L. (2013). Project Update: The Liquidation Basis of Accounting. Financial Accounting Standards Board. Retrieved on March 10, from http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176160506576 This is an important site that provides a number of information regarding the liquidation basis of accounting project update. Throughout the website, the two authors have effectively summarized some of the major decisions of the financial accounting standards board (FASB). It is however worth noting that some of the decisions included on the site are currently tentative and therefore have no effect o the current accounting. North B., Wagenen, L. (2013). Current Technical Plan and Project Updates. Financial Accounting Standards Board. Retrieved on March 10, 2013 from http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1218220137074 This website critically discusses some of the current technical plan and project updates of the financial accounting standards board. The site entails interconnecting summaries of projects prepared by staff, in a way that offers a description of Boards decision and provision of information. The authors argue that the project is focused on facilitating change. Association of Insolvency & Restructuring Advisors AIRA. (2012). Liquidation Basis of Accounting: FASB Proposes Guidance on Topic for Which Little Has Been Written. AIRA Journal, 26(3): p. 4-22. Published by AIRA, this is an interesting article that attempts to provide guidance focused on circumstances that require appropriate application of liquidation basis accounting. Nevertheless, other ways through are used in offering explicit guidance is offered in application of liquidation basis accounting such as International Financial Reporting Standards. Research Log/Tracker No. Date Information Sought. Tool / Source Used  Concepts or Keywords, Search Strategy Results Decision, Action, Next Step 1 03/11 History the liquidation basis of accounting project Internet search FASB, liquidation basis accounting  Keyword search Sufficient information collected I have cited the sources 2 03/11 Project’s current status Library and Goggle search FASB ongoing project  Keyword search There is little literature on the current status of liquidation basis of accounting project  Will conduct further research on books 3 03/11 Implications of the project's adoption Internet search, Library reference section Implications of FASB ongoing project Keyword search Little literature on the implications of the project Will check other reference books. Read More