ASC 205-30-25 requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective, and the likelihood is remote that the execution of the plan will be blocked by other parties, or (b) a plan for liquidation is being imposed by other forces (for example, involuntary plan termination). For a single-employer defined benefit or defined contribution plan, this would mean that the likelihood would need to be remote that other parties, such as the Pension Benefit Guaranty Corporation or the IRS, would block the liquidation. Such evaluation often depends on whether the termination is a standard termination, or a distressed or involuntary termination. Further, approval for the termination of a defined benefit plan is often more complex than that of a defined contribution plan.

For all types of plans, consultation with legal counsel, plan actuaries (if applicable), and service organizations (for example, trustees or record keepers) may be necessary in order to make a judgment about whether the likelihood is remote that other parties would block the termination of a plan. This evaluation may change over time, depending on the stage of the termination process. Refer to Chapter 6 in PwC’s Bankruptcies and liquidations guide and the AICPA Employee Benefit Plans Expert Panel Q&A, section 6931.18 (AICPA, Technical Question and Answers) for additional information on determining when liquidation may be considered imminent.

A plan is required to measure assets at the estimated amount it expects to collect in settling or disposing of those assets. A plan should also accrue estimated costs to dispose of assets and costs it expects to incur (for example, audit and actuarial fees) during the liquidation period. However, a plan should not apply discounting provisions in measuring such accruals. Since the majority of plan assets are recorded at fair value, the liquidation basis may have little to no effect on the plan’s statement of net assets or changes in net assets (except in instances when the plan has insurance or investment contracts recorded at contract value). However, if the fair value or the liquidation value does not include future expected earnings, the plan should accrue income that it expects to earn through the end of liquidation if and when it has a reasonable basis for estimation. For example, the interest to be earned on a money market account or interest-bearing security generally would not be included in the fair value, so those amounts would be estimated and reported on the financial statements if and when the plan has a reasonable basis for estimation.

For defined benefit plans, accumulated plan benefits presented on the statement of benefit obligations must also be determined on the liquidation basis. This typically means significant variations in the accumulated plan benefits for a plan on the liquidation basis from a plan considered to be a going concern. These variations are caused by changes in assumptions, as well as the reporting of all benefits as vested. See AAG-EBP 5.203-5.205 for liquidation accounting considerations.