For companies that are on the brink of meltdown, the Financial Accounting Standards Board is proposing new guidance to help determine when it's appropriate to switch their accounting basis from that of a going concern to liquidation, and how to do so.

Accounting standards assume that a company following them is a going concern with every expectation that it will remain in business for the foreseeable future, but the accounting is expected to change when it's clear the company is winding down and liquidating. FASB says companies have followed different practices in making that transition to liquidation accounting so it issued a proposed Accounting Standards Update to put all companies on the same page.

The proposal says a company should switch when management determines liquidation is imminent. It defines imminent to mean someone with authority has approved a plan for liquidation, or a plan for liquidation has been imposed, for example through a bankruptcy action. It also addresses situations when an entity's governing document specify a plan for liquidation, as with limited-life entities.

Under the proposal a company would be required to show in financial statements the relevant information about an entity's resources and obligations by measuring and and presenting assets and liabilities based on the amount of cash or other consideration that the company reasonably expects to collect or spend. The company also would need to disclose the plan for liquidation, the methods and assumptions used to measure assets and liabilities, the expected duration of liquidation, and the type and amount of costs and income accrued. FASB has not set a planned effective date for the new standard. The board is accepting comments on it through Oct. 1.

In a separate project, FASB has determined it will require new disclosures to resolve issues around reclassification adjustments out of accumulated other comprehensive income. The board deferred certain reclassification requirements associated with Accounting Standards Update No. 2011-05 to address concerns that the reclassifications would be costly to preparers and would confuse readers of financial statements. FASB deferred the reclassification requirements while it studied the issue, and determined recently it will fix the problem with a new disclosure requirement. The board expects to issue an exposure draft soon.

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