Corporate

Liquidation
Accounting for Special Transactions (AC14)
Week 2 Topic 1
Let’s learn some
Deutcsh!
Good morning! Guten Morgen!
Good day! Guten Tag!
Good evening! Guten Abend!
Good night! Gute Nacht!
 Learning Objectives
❖ Explain the accounting for corporate liquidation.
❖ Differentiate the classifications of assets and liabilities
in the Statement of Affairs.
❖ Determine the order of priority of claimants of
company assets subject to liquidation.
❖ Prepare Statement of Affairs, Deficiency Statement
and Statement of Realization and Liquidation.
 TABLE OF CONTENTS

01. 02. 03. 04.

Introduction Measurement Basis Financial Reports Assignment
01.
INTRODUCTION
01.
INTRODUCTION
CORPORATE LIQUIDATION is the
process of winding up of affairs
or termination of business
operation.
01.
INTRODUCTION
Why is there a
CORPORATE LIQUIDATION ?

The most common reason is

INSOLVENCY
01.
INTRODUCTION
INSOLVENCY

>
LIABILITIES ASSETS
01.
INTRODUCTION
INSOLVENCY
≠ ILLIQUIDITY
01.
INTRODUCTION
ILLIQUIDITY

>
ASSETS LIABILITIES

Not enough cash to pay liabilities.

 01.
INTRODUCTION
ILLIQUIDITY

>
ASSETS LIABILITIES

5M 3M

3M 2M
PPE Cash
01.
INTRODUCTION
CORPORATE LIQUIDATION
❖ Sell non-cash assets
❖ Pay obligations and
liquidation expenses
❖ Distribute remaining assets to
the owners
 02.
Measurement Basis
 02.
Measurement Basis
PFRSs
Cost Fair Value

Net Realizable Value

Value in Use Carrying Value

02.
Measurement Basis
For example:
How do you measure Inventory?

Under PAS 2 Inventories

Initial measurement:
@ Cost
Subsequent measurement:
@ lower of Cost and NRV
02.
Measurement Basis
What about if the corporation is
under liquidation?

Is there an effect on the

measurement bases?

Yes! There is an effect.

02.
Measurement Basis
According to IFRS Framework 4.1:
“…the going concern assumption is an
underlying assumption. Thus, the
financial statements presume that an
entity will continue in operation
indefinitely or, if that presumption is not
valid, disclosure and a different basis
of reporting are required.”
02.
Measurement Basis
What are the measurement bases
during corporate liquidation?

ASSETS: @ NRV (Estimated Selling Price

- Estimated Disposal Cost)

LIABILITIES: @ ENSA (Principal + Interest

+/- Other Adjustments)
3.0
Financial Reports
03.
Financial Reports
Statement of Affairs

Deficiency Statement

Statement of Realization and Liquidation

03.
Financial Reports
Statement of Affairs
It is like a regular Statement of
Financial Position, but the assets
are measured at realizable values,
the liabilities at expected net
settlement amounts and the
presentation is different.
03.
Financial Reports
Statement of Affairs
Assets
1) Assets pledged to fully secured
creditors (AFS)
2) Assets pledged to partially secured
creditors (APS)
3) Free assets (FA)
03.
Financial Reports
Statement of Affairs
Liabilities
1) Fully secured creditors (FS)
2) Partially secured creditors (PS)
3) Unsecured liabilities with priority (U w/)
4) Unsecured liabilities without priority
(U w/o)
 ILLUSTRATION:
Assets Book Values NRV/ENSA
Cash 60,000 60,000
Inventory 90,000 75,000
Equipment 250,000 150,000
Land 5,000,000 6,000,000
Building 1,500,000 1,200,000
6,900,000 7,485,000

Liabilities and Shareholders’ Equity

Accounts Payable 120,000 100,000
Salaries Payable 50,000 50,000 8,150,000
Loans Payable 8,000,000 8,000,000
Capital Stock 500,000 500,000
Retained Earnings, Deficit (1,770,000) (1,165,000)
6,900,000 7,485,000
 Liabilities Assets
FS BPI 5,000,000 6,000,000 Land AFS
(5,000,000)
1,000,000
PS BDO 3,000,000 1,200,000 Building APS
(1,200,000)
1,800,000
U w/ Employee 50,000 0

U w/o Supplier 100,000 0

BDO 1,800,000 60,000 Cash
75,000 Inventory
FA
150,000 Equipment
1,000,000 Land
 Liabilities Assets

U w/ Employee 50,000 0

U w/o Supplier 100,000 0

BDO 1,800,000 60,000 Cash
75,000 Inventory
FA
150,000 Equipment
1,000,000 Land
1,285,000 Total Free Assets
 Liabilities Assets

U w/o Supplier 100,000 0

BDO 1,800,000 60,000 Cash
1,900,000 75,000 Inventory
FA
150,000 Equipment
1,000,000 Land
Recovery NFA 1,285,000 Total Free Assets
=
Percentage U w/o ( 50,000 ) Employee U w/
1,235,000 Net Free Assets
 Liabilities Assets

U w/o Supplier 100,000 0

BDO 1,800,000 60,000 Cash
1,900,000 75,000 Inventory
FA
150,000 Equipment
1,000,000 Land
Recovery 1,235,000 1,285,000 Total Free Assets
= = 65%
Percentage 1,900,000 ( 50,000 ) Employee U w/
1,235,000 Net Free Assets
 Liabilities Assets
FS BPI 5,000,000 5,000,000 Land AFS

PS BDO 3,000,000 1,200,000 Building APS

U w/ Employee 50,000 0

U w/o Supplier 100,000 0

60,000 Cash
75,000 Inventory
FA
150,000 Equipment
1,000,000 Land
 Liabilities Assets
FS BPI 5,000,000 5,000,000 Land AFS
PS BDO 3,000,000 1,200,000 Building APS
U w/ Employee 50,000 60,000 Cash
U w/o 100,000 75,000 Inventory
Supplier FA
150,000 Equipment
8,150,000 1,000,000 Land
Estimated Recoveries: 7,485,000
Type of Creditor Claims Recovery % Estimated Recovery
FS 5,000,000 100% 5,000,000
PS 3,000,000 1.2M + (1.8M x 65%) 2,370,000
U w/ 50,000 100% 50,000
U w/o 100,000 65% 65,000
8,150,000 7,485,000
 Liabilities Assets
FS BPI 5,000,000 5,000,000 Land AFS
PS BDO 3,000,000 1,200,000 Building APS
U w/ Employee 50,000 60,000 Cash
U w/o 100,000 75,000 Inventory
Supplier FA
150,000 Equipment
8,150,000 1,000,000 Land
7,485,000
How much is the estimated deficiency?
Assets - Liabilities = Shareholders’ Equity or U w/o x (1 – RP)
7,485,000 - 8,150,000 = (665,000) 1,900,000 x (1 – 65%) = 665,000
Assets Book Values NRV/ENSA Estimated Gain/(Loss)
Cash 60,000 60,000 0
Inventory 90,000 75,000 (15,000)
Equipment 250,000 150,000 (100,000)
Land 5,000,000 6,000,000 1,000,000
Building 1,500,000 1,200,000 (300,000)
6,900,000 7,485,000

Liabilities and Shareholders’ Equity

Accounts Payable 120,000 100,000 20,000
Salaries Payable 50,000 50,000 0
Loans Payable 8,000,000 8,000,000 0
Capital Stock 500,000 500,000 500,000
Retained Earnings, Deficit (1,770,000) (1,165,000) (1,770,000)
6,900,000 7,485,000 (665,000)
 4.0 Assignment
Prepare Statement of Affairs and Deficiency
Statement based on the illustration discussed
today.
 Danke!
Any questions?

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