AFAR 05: CORPORATE LIQUIDATION
Insolvency
A debtor corporation is considered insolvent when it
is unable to pay its debts as they come due.
Corporate Liquidation
It is the process of winding up the affairs of a
corporation
Financial Reports of a Corporation in
Liquidation
Statement of Affairs
It is the initial report that shows the available asset
values and debts of the debtor corporation.
Statement of Realization and Liquidation
It is the periodic report of the receiver (i.e., a person
appointed as a custodian of another entity's
property by a court of law or a creditor of the
corporation) that shows how he managed the
assets of the debtor corporation on behalf of the
creditors.
Classification of Assets of a Corporation in
Liquidation
Asset Pledged to Fully Secured Creditors
(APTFSC)
It is an asset pledged as security for a particular
liability, the former’s estimated realizable value of
which exceeds the amount of the latter.
Asset Pledged to Partially Secured Creditors
(APTPSC)
It is an asset pledged as security for a particular
liability, the former’s estimated realizable value of
which is less than the amount of the latter.
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Free Asset
It is an asset that is not pledged as security for any
particular liability and thus available to meet the
claims of priority liabilities and unsecured creditors.
Classification of Liabilities of a Corporation in
Liquidation
Unsecured Liabilities with Priority (ULWP)
These are claims whose creditors have no lien on
any specific assets of the debtor corporation, but
their claims rank ahead of other unsecured
liabilities. These liabilities are the following, paid in
the order of priority:
1. Administrative expenses of the receiver;
2. Unpaid employee’s salaries, wages and
benefit plans; and
3. Taxes.
Fully Secured Liabilities (FSL)
For these liabilities, the creditor has a lien on
specific assets, whose estimated realizable value
exceeds the amount of the liability.
Partially Secured Liabilities (PSL)
For these liabilities, the creditor has a lien on
specific assets but the estimated realizable value of
those assets is less than the amount of the liability.
Unsecured Liabilities
These are all other liabilities for which the creditor
has no lien on any specific assets of the debtor
corporation.
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 AFAR 05: CORPORATE LIQUIDATION

General Formula for Corporate Liquidation

Numerator Denominator
Excess of APTFSC over FSL Excess of PSL over APTPSC
(APTFSC - FSL) xxx (PSL - APTPSC) xxx
+ Initial free assets xxx - Unsecured liabilities (w/o priority) xxx
= Total free assets xxx = Total unsecured liabilities xxx
- ULWP
Administrative exp. xxx
Salaries xxx
Taxes xxx xxx
= Net free assets xxx
a. % of recovery = Net free assets / Total unsecured liabilities
b. Estimated deficiency = Net free assets - Total unsecured liabilities

Computation for Total Payment to All Creditors

Fully secured liabilities xxx

+ Partially secured liabilities:
Assets pledged to partially secured liabilities (Amount * 100%) xxx
Excess of PSL over APTPSL (Amount * % of recovery) xxx xxx
+ Unsecured liabilities with priority xxx
+ Unsecured liabilities without priority (Amount * % of recovery xxx
= Total payment to all creditors xxx
= Net realizable value of all assets xxx

Statement of Realization and Liquidation

Assets to be realized xxx Assets realized xxx

Assets acquired xxx Assets not realized xxx
Liabilities liquidated xxx Liabilities to be liquidated xxx
Liabilities not liquidated xxx Liabilities assumed xxx
Supplementary charges xxx Supplementary credits xxx
Net income xxx Net loss xxx

Computation for Ending Cash Balance

Equity xxx
+ Liabilities not liquidated xxx
- Assets not realized xxx
= Ending cash balance xxx

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