CORPORATE LIQUIDATION

Liquidation

Liquidation is the termination of business operations or the winding up of affairs. It is a process by

which:

1. the assets of the business are converted into cash,

2. the liabilities of the business are settled, and

3. any remaining amount is distributed to the owners.

Measurement Basis

For entities undergoing liquidation, the appropriate measurement basis is realizable value.

1. For assets, realizable value is estimated selling price less estimated costs to sell.

2. For liabilities, realizable value is the expected net settlement amount.

Liquidating entities usually prepare the following classes of financial reports:

1. Statement of affairs

2. Statement of realization and liquidation

Statement of Affairs

Assets in the statement of affairs are classified into the following:

1. Assets pledged to fully secured creditors – these are assets with realizable values equal to or
greater than the realizable values of the related liabilities for which these assets have been
pledged as security.

2. Assets pledged to partially secured creditors – these are assets with realizable values less than
the realizable values of the related liabilities for which these assets have been pledged as
security.

3. Free assets – these are assets that have not been pledged as security of liabilities. These also
include the excess of realizable values of assets pledged to fully secured creditors over the
realizable values of related liabilities for which these assets have been pledged.

Liabilities in the statement of affairs are classified into the following:

1. Unsecured liabilities with priority – these are liabilities that, although not secured by any asset,
are mandated by law to be paid first before any other unsecured liabilities. These liabilities
include the following: Administrative expenses, Unpaid employee salaries and other benefits
and Taxes and assessments
 2. Fully secured creditors – these are liabilities secured by assets with realizable values equal to or
greater than the realizable values of such liabilities.

3. Partially secured creditors – these are liabilities secured by assets with realizable values less
than the realizable values of such liabilities.

4. Unsecured liabilities without priority – all other liabilities not classifiable under (1), (2) or (3)
above.

TOTAL ASSETS (at NRV or FV)

- Assets pledged to fully secured creditors xx
- Assets pledged to partially secured creditors xx
- Free assets (assets not pledged + excess of assets pledged to
fully secured creditors over fully secured debts) xx xx

TOTAL LIABILITIES (at settlement amount or BV)

- Unsecured with priority
o Administrative expenses
o Employee salaries and benefit plans
o Liabilities for corporate crimes
o Taxes
o Judgement debts xx
- Fully secured debts xx
- Partially secured debts (secured portion) xx (xx)
NET FREE ASSETS (NFA) xx
UNSECURED DEBTS WITHOUT PRIORITY (UD)
- Partially secured debts (unsecured portion)
- Other unsecured debts (xx)
ESTIMATED DEFICIENCY xx

Recovery Rate = Net Free Assets (NFA) divided by Unsecured Debts Without Priority (UD)

Creditor Recoverable Amount

Unsecured debts with priority 100%
Fully secured debts 100%
Partially secured debts NRV of assets pledged + (Balance x Recovery Rate)
Unsecured debts Balance x Recovery Rate
Statement of Realization and Liquidation

Assets to be liquidated (excluding cash) xx xx Assets realized (at net proceeds)

Assets acquired xx xx Assets not realized (at book value)
Liabilities liquidated (at settlement amount) xx xx Liabilities to be liquidated (at book value)
Liabilities not liquidated xx xx Liabilities assumed
Supplementary losses and expenses xx xx Supplementary revenues and gains
Net loss xx xx Net gain

Miscellaneous Formulas

Estate deficit, beginning balance xx

+ Liabilities assumed xx
- Assets acquired (xx)
+/- Gain/Loss xx
Estate deficit, ending balance xx

Cash, beginning balance xx

+ Assets realized xx
- Liabilities liquidated (xx)
- Administrative expenses (xx)
Cash, ending balance xx

Assets = Liabilities + Owners’ Equity

(Assets not realized and cash) (Liabilities not liquidated) (Estate deficit)