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    Week 2 Topic 1 Corporate Liquidation

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    Jenny Lelis
    The document discusses the accounting procedures for corporate liquidation, including preparing a statement of affairs to classify assets and liabilities, a deficiency statement to determine any shortfall to unsecured creditors, and a statement of realization and liquidation to estimate the recovery percentages for different classes of claimants based on estimated proceeds from selling the company's assets. Creditors are paid out according to their priority, with fully secured creditors receiving payment first from secured assets.

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    Week 2 Topic 1 Corporate Liquidation

    Uploaded by

    Jenny Lelis
    32 views35 pages
    The document discusses the accounting procedures for corporate liquidation, including preparing a statement of affairs to classify assets and liabilities, a deficiency statement to determine any shortfall to unsecured creditors, and a statement of realization and liquidation to estimate the recovery percentages for different classes of claimants based on estimated proceeds from selling the company's assets. Creditors are paid out according to their priority, with fully secured creditors receiving payment first from secured assets.

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    The document discusses the accounting procedures for corporate liquidation, including preparing a statement of affairs to classify assets and liabilities, a deficiency statement to determine any shortfall to unsecured creditors, and a statement of realization and liquidation to estimate the recovery percentages for different classes of claimants based on estimated proceeds from selling the company's assets. Creditors are paid out according to their priority, with fully secured creditors receiving payment first from secured assets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    32 views35 pages

    Week 2 Topic 1 Corporate Liquidation

    Uploaded by

    Jenny Lelis
    The document discusses the accounting procedures for corporate liquidation, including preparing a statement of affairs to classify assets and liabilities, a deficiency statement to determine any shortfall to unsecured creditors, and a statement of realization and liquidation to estimate the recovery percentages for different classes of claimants based on estimated proceeds from selling the company's assets. Creditors are paid out according to their priority, with fully secured creditors receiving payment first from secured assets.

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    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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