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The FASB has issued FASB update no. 2013-07 "Liquidation Basis of Accounting" which will be effective for annual periods beginning after December 15, 2013, and interim reporting periods therein. The FASB has issued this update to explain when the liquidation basis of accounting should be applied. The FASB has indicated that an entity will be required to apply liquidation basis of accounting when the likelihood is remote that the entity will return from liquidation (i.e., liquidation is imminent) and either of the following occurs:
The common question we have received from our clients is how will the update effect entities which are either incorporated for a specific task or there is an end date other than perpetuity. This is usually seen in specific purpose partnerships or joint ventures that are set up to complete a specific task. The FASB has stated that liquidation accounting would only be imminent if the approved plan for liquidation was different from the plan specified in the entity incorporation or formation documents. In other words, if an entity is set up to complete a task and they are in the last year of completing that specific task, liquidation accounting would not be applicable since, at inception, the entity's formation document specified the purpose and end date of the entity.