CORPORATE

LIQUIDATION

ADVANCE FINANCIAL ACCOUNTING AND REPORTING

 INTRODUCTION

Prepare the Statement of:

1. Affairs
2. Deficiency
3. Realization and liquidation
4. Determine the order of priority of the
claimants to the company assets of a
corporation subject to liquidation
 LIQUIDATION TIMELINE
01 02 03

FINANCIAL
MISMANAGEMENT INSOLVENCY
PROBLEMS

04 05

CORPORATE
LIQUIDATION/
BANKRUPTCY
REORGANIZATI
ON
 01

INSOLVENCY
 INSOLVENCY

PAS 1, “Presentation of Financial Statements” requires

that an entity considers “all available information about
the future, which is at least, but is not limited to twelve
months from the end of the reporting period” when
assessing whether the going concern assumption is
appropriate or not.
 INSOLVENCY
● Primarily governed by the provisions of the New Civil Code
and secondarily by the Insolvency Law (Act 1956 as
amended by PD 902-A (SEC)
● An entity is said to be insolvent when it is unable to pay
off its liabilities as they become due and demandable
● LEGAL POV: Insolvency - as a financial condition in which
the sum of all its debt is greater than all its assets at fair
valuation.
 INSOLVENCY
VOLUNTARY INVOLUNTARY

● When the insolvent entity ● The petition is made by

itself petitions the three or more creditors.
Regional Trial Court that it ● The debtor has committed
be declared as insolvent. an act of insolvency
● Debtor has insufficient
assets to pay its debt in
full.
 INSOLVENCY
NOTES:
● When a debt entity is declared insolvent, its assets and
liabilities are placed within the jurisdiction and control of
the court in insolvency without affecting the liens of
mortgages and pledges.
● An assignee is subsequently elected to take care of the
liquidation process.
● Creditor’s claims are then satisfied from the liquidation
proceeds.
ROLE OF COURT IN LIQUIDATION
REGIONAL TRIAL COURT
● Oversees all aspects of the bankruptcy proceedings.
● FIRST ACTS OF THE COURT:
○ Either to dismiss the debtor’s or creditor’s
bankruptcy petition, or
○ To grant an order for relief under the Insolvency
Law.
● The court appoints an interim trustee after the order for
relief, to serve permanently or until a trustee is elected by
the creditors
 ROLES
Creditors: The “outsider” creditors appoint a trustee to manage
the debtor’s estate.
Trustee: Assumes custody of the debtor’s nonexempt property.
● Continue operating the debtor’s business if directed by the
court
● Realize the free assets of the debtor’s estate
● Pay cash to unsecured creditors.
● Keeping accounting records to enable the filing of a final
report with the court.
Accountant: Proper reporting of the financial condition of the
debtor and adequate accounting and reporting for the trustee.
 02

STATEMENT
OF AFFAIRS
 STATEMENT OF AFFAIRS
● Financial condition prepared for a corporation entering
into the stage of liquidation or bankruptcy.
● A report designed to show the estimated amount that
would be received by each class of claim in the event of
liquidation.
● Use the amount expected to be realized as the relevant
valuation basis.
 STATEMENT OF AFFAIRS

● Financial condition prepared for a corporation entering

into the stage of liquidation or bankruptcy.
● A report designed to show the estimated amount that
would be received by each class of claim in the event of
liquidation.
● Use the amount expected to be realized as the relevant
valuation basis.
FORMAT OF THE STATEMENT OF AFFAIRS
 STATEMENT OF AFFAIRS (ASSETS)
Assets pledged to fully secured EXAMPLE:
creditors: Expected to realize an amount Land (realizable value) - P2M (Assets
pt FSC)
of least sufficient to satisfy the related debt Mortgage payable (secured to
bank)-P1.5M (FSL)
Assets pledged to partially secured
After mortgage is settled- 500k (Free
creditors: Expected to realize an amount Assets)
below the related debt.
Machinery (RV) - P600K (Assets pt
Free Assets: Not pledged and are PSC)
available to satisfy the claims of creditors Notes payable (secured)- P800K (PSL)
with priority, partially secured creditors, and After notes payable is settled - P200k
unsecured creditors. (UC)
 STATEMENT OF AFFAIRS (LIABILITIES)
Unsecured Liabilities with Priority: Sec 50 of the insolvency law provides
preferred claims which shall be paid in the order named:

(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their
parental authority and have no property of their own, when approved by the court;
(b) Debts due for personal services rendered the insolvent by employees, laborers, or
domestic servants immediately preceding the commencement of proceedings in insolvency;
(c) Compensation due the laborers or their dependents under the provisions of Philippine
Laws
(d) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for
the common interest of the creditors, when properly authorized and approved by the court;
(e) Debts, taxes, and assessments due the National Government;
(f) Debts, taxes, and assessments due to any province or provinces of the Philippines
(g) Debts, taxes, and assessments due to any municipality or municipalities of the
Philippines
STATEMENT OF AFFAIRS (LIABILITIES)
Fully secured liabilities: Expect to EXAMPLE:
Land (realizable value) - P2M
be paid in full as a result of their (Assets pt FSC)
having sufficient collateral (pledged Mortgage payable (secured to
bank)-P1.5M (FSL)
assets) to satisfy the indebtedness. After mortgage is settled- 500k
(Free Assets)
Partially secured liabilities: Have Machinery (RV) - P600K (Assets pt
collateral (pledged assets), the PSC)
Notes payable (secured)- P800K
proceeds of which are expected to (PSL)
be insufficient to satisfy the After notes payable is settled -
P200k (UC)
indebtedness.
STATEMENT OF AFFAIRS (LIABILITIES & EQUITY)

UNSECURED CREDITORS: No collateral (pledged assets) relating to

their indebtedness. This includes the unsecured portion of the partially
secured liabilities. Normally referred to as General Creditors.

Capital: Balances summarizing the interests of the owners in the

business are reported under the heading “Capital” or “Stockholders’
Equity”.
FORMAT OF THE STATEMENT OF AFFAIRS
 STATEMENT OF AFFAIRS
ACCOUNTING AND REPORTING FOR
TRUSTEE/RECEIVER
● Opens a new set of accounting records.
● Assets and liabilities are recorded at book value rather
than NRV.
● Contra asset accounts are omitted because they are not
necessary in liquidation
● The reports usually prepared b the trustee are a
statement of Cash receipts and cash disbursements, and
statement of realization and liquidation.
 03

STATEMENT
OF
DEFICIENCY
 STATEMENT OF DEFICIENCY

● Usually prepared to accompany the statement of

affairs to prove the deficiency to unsecured creditors.
● Shows the causes of this deficiency by summarizing
losses and gains from realization and unrecorded
adjustments to assets and liabilities.
STATEMENT OF DEFICIENCY
 04
STATEMENT OF
REALIZATION AND
LIQUIDATION
STATEMENT OF REALIZATION AND LIQUIDATION

● An activity statement progress toward the liquidation

of a debtor’s estate
● Shows the actual transaction that transpired during the
period covered.
● Informs the proper authorities and interested creditors of
the accomplishments of the trustee.
STATEMENT OF REALIZATION AND LIQUIDATION

STATEMENT OF REALIZATION
AND LIQUIDATION STATEMENT OF AFFAIRS

● Reports actual liquidation ● Pro forma nature and is

results
● Provides ongoing reporting of
the trustee’s activities and is
update throughout the
liquidation process.
based on estimates rather
then actual results.
● Summary of the estimated
results of a completed
liquidation.
 TRADITIONAL OR CONVENTIONAL APPROACH

Identifies the individual Identifies proceeds

assets to which the received from the
trustee has taken title
Assets (except cash)
conversion of specific
from the debtor assets
Assets to be realized Assets realized

Assets acquired Assets not realized

Itemizes the assets Identifies the assets
discovered or received remaining with the
from operating activities trustee at the end of
during the period. reporting period
 TRADITIONAL OR CONVENTIONAL APPROACH

Identifies the liabilities

Identifies specific
Liabilities that the trustee took
liabilities paid by the
responsibility for at the
trustee
Liabilities liquidated Liabilities to be date of appointment
liquidated

Reflects those that Liabilities not Liabilities incurred Reflects the liabilities
remain to be paid by liquidated incurred by the trustee
the trustee for operating activities
during the period.
TRADITIONAL OR CONVENTIONAL APPROACH

Revenues and Expenses

Supplementary Supplementary
expenses (excluding credits (revenues
assets losses and excluding gains on
write-offs) assets realization
and liability
settlemets