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ASC 205 requires that the financial statements prepared on the liquidation basis of accounting consist of, at a minimum, (1) a statement of net assets in liquidation and (2) a statement of changes in net assets in liquidation. Further, a nonregistered investment company’s statement of net assets in liquidation would include a schedule of investments in liquidation. In circumstances when the liquidation basis of accounting has been adopted, financial statement headings should disclose the status of the reporting entity. This would generally be "in liquidation." However, entities such as private funds that are domiciled in the Cayman Islands may wish to use another term, such as "prepared on the liquidation basis of accounting," as the term "in liquidation" has a distinct legal meaning in the Cayman Islands.
Other financial statements, financial highlights, and schedules are not required to be presented. However, a reporting entity may present additional financial statements or disclosures if these items are useful in understanding the cash the reporting entity expects to collect and the amount the reporting entity is obligated or expects to be obligated to pay during the course of liquidation. Information that contradicts the liquidation basis financial information or has the potential to confuse or mislead users of the financial statements should not be included in liquidation basis financial statements.
The presentation of certain voluntary information, including additional core financial statements and financial highlights, has an increased potential to confuse or mislead financial statement users. For example, because the liquidation basis of accounting is intended to reflect all future cash receipts and expenditures, a statement of operations during a liquidation period would not be expected to reflect operations of the fund the same way those operations were reflected before a liquidation period. In general, a statement of operations during a liquidation period would not be expected to contain any meaningful activity when the provisions of ASC 205 have been applied appropriately. Significant operations during a liquidation period may indicate that certain balances (e.g., liquidation costs) were not estimated with sufficient accuracy at the initial adoption of ASC 205.
Likewise, because the objective of liquidation basis accounting is fundamentally different than the objective of going concern accounting, financial highlights based on liquidation basis accounting have an increased risk of being misunderstood by financial statement users. For example, because the total return computation formula used by asset managers assumes reinvestment of dividends, implausible results sometimes occur when the formula is applied to interim distributions made by a fund in liquidation since active investment operations have ceased and "reinvestment" implies simply buying more of the remaining investments in the fund. Further, as a reporting entity nears complete liquidation and its capital dwindles, the denominators for many ratios do not provide meaningful results. Also, it may not be appropriate to annualize the net investment income and expense ratios when the reporting entity has adopted the liquidation basis of accounting as liquidation costs have been accrued through final liquidation (which may take longer than a year). Even if the liquidation basis values to be reported are expected to approximate values that would have been reported in non-liquidation basis financial statements (i.e., as if the fund were not in liquidation), the potential for misunderstanding still exists.
For these reasons, the liquidation basis financial statements of private funds generally should not include financial statements or financial highlights that are not required by ASC 205.
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