Personal Financial Statements and Liquidation Basis of Accounting

Question 1

Are personal financial statements prepared in accordance with GAAP?

Answer 1

NO, they are more like an OCBOA (special-purpose framework basis)

Question 2

What basis are personal financial statements prepared under?

Answer 2

Accrual basis

Question 3

Assets are reported at what value in personal financial statements?

Answer 3

Estimated current value

Question 4

Liabilities are reported at what value in personal financial statements?

Answer 4

Current amount

Question 5

What is meant by estimated current value of assets in personal financial statements? What is needed to arrive at it?

Answer 5

Amount at which an asset can be exchanged between a buyer and seller, assuming:

1) Both parties are well informed
2) Both parties are willing to enter into the transaction and not being compelled to buy or sell (not forced)

Question 6

How are life insurance policies valued on personal financial statements?

Answer 6

At their cash surrender value less and loans made against the policy (policies)

Question 7

What are the typical personal financial statements?

Answer 7

Statement of Financial Condition (B/S) -and-

Statement of Changes in Net Worth (I/S & R.E.)

Question 8

What is the statement of financial condition comprised of? (personal financial statement)

Answer 8

Assets - Liabilities - Estimated income tax on current value of assets over their tax bases = Net Worth

Question 9

Where are income taxes presented on the statement of financial condition?

Answer 9

Between liabilities and net worth

Question 10

What comprises the personal statement of changes in net worth?

Answer 10

Revenues and gains - expenses and losses. Must also include any changes in estimated current values of assets.

Question 11

Would pension benefits be included in personal financial statements?

Answer 11

Not until they are fully vested and available for withdrawal by the client

Question 12

If an entity comes to the conclusion that it is no longer able to continue as a going concern, is GAAP still the applicable basis of accounting? If not, what basis is applicable?

Answer 12

No, the liquidation is applicable

Question 13

Is the liquidation basis of accounting applicable to public entities and non-profits, as well?

Answer 13

Yes

Question 14

How are assets measured in liquidation basis accounting?

Answer 14

At the amount of consideration (cash) they are expected to generate upon liquidation (as opposed to NRV). Any assets that won’t generate cash will be downgraded to zero (via expensing).

Question 15

Would intangible assets be recognized in liquidation basis accounting?

Answer 15

If they will generate cash upon liquidation (such as selling of a patent or customer lists), they can be recognized.

Question 16

How are future asset disposal costs treated for liquidating entities?

Answer 16

As liabilities

Question 17

How are liabilities measured in liquidation basis accounting?

Answer 17

They will continue to be measured in accordance with GAAP, although adjustments will likely have to be made due to expected timing of payments following liquidation plan.

Question 18

For liquidating entities, how would anticipated earned income and incurred costs be recognized?

Answer 18

They would be accrued based on estimates in the period when the liquidation method is initially applied.

Question 19

What are the minimum financial statements that liquidating entities will consist of?

Answer 19

1) A statement of net assets in liquidation (B/S)

2) A statement of changes in net assets in liquidation (I/S)

Question 20

What type of disclosures might be included with financial statements prepared under the liquidation basis of accounting?

Answer 20

1) A statement that the financial statements are prepared using the liquidation basis of accounting
2) A description of the liquidation plan (asset disposal, liabilities settlement, estimated timeframe)
3) Methods and assumption used to measure assets and liabilities