In an effort to improve financial reporting and reduce the diversity in practice, the Financial Accounting Standards Board (FASB) on April 22, 2013 issued an Accounting Standards Update ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, clarifying when and how public and private companies and not-for-profit organizations should prepare financial statements using this method.
Liquidation enables a business to convert assets to cash (or other assets) to satisfy creditors before permanently suspending operations. The process requires an entity to “measure its assets at the estimated amount of cash or other consideration it expects to collect and its liabilities at the amount otherwise prescribed under U.S. GAAP,” according to FASB. Further, the board says, “an organization in liquidation must prepare its financial statements using a basis of accounting that communicates information to users of those financial statements to enable those users to develop expectations about how much the organization will have available for distribution to investors after disposing of its assets and settling its obligations.”