Professional Documents
Culture Documents
AFAR-03 (Corporate Liquidation)
AFAR-03 (Corporate Liquidation)
CORPORATE LIQUIDATION
Enterprises in Financial Difficulty. Business Failure is a common phenomenon in a free enterprise
company. It may be due to a variety of reasons such as incompetent management, poor operating
control, inadequate financing, fraud, or other unexpected adverse developments. Among the inevitable
symptoms of business failure is a shortage of funds or a lack of liquidity, which results in the enterprise’s
inability to meet its current obligations as they become due.
Liquidity. Liquidity refers mainly to a firm’s ability to meet its short-term obligations, while solvency relates
to the longer time span of obligation. Both of these situations are interrelated. An auditor who examines
the financial statements of an enterprise with a history of losses and resulting financial difficulties and which
may even be in default of loan agreement covenants must, at some point, evaluate the enterprise’s ability
to survive financially. If there is evidence that the ability of the enterprise to continue as a going concern
can no longer be safely assumed, the auditor may have to qualify his or her opinion, or, in some cases
disclaim an opinion.
Insolvency. A business enterprise can be insolvent in the conventional (or equity) sense when it is unable
to pay off its liabilities as they become due. The enterprise is insolvent in the legal sense when the financial
condition is such that the sum of the entity’s debts is greater than all of such entity’s property at fair
valuation. Thus, in the legal sense, an enterprise remains solvent as long as the fair value of its assets exceeds
its liabilities, even though the enterprise cannot meet its current maturing obligations because of an
insufficiency of liquid resources.
Liquidations. When the financial position of the debtor is such that it cannot resolve its financial
difficulties by any of the following quasi-reorganization, troubled-debt restructuring, and dacion-en-pago
accounting, the corporation will have to resort to liquidation. This process may be started by the debtor
filing a debtor’s voluntary petition or creditor’s involuntary petition.
Trustee in Bankruptcy. The duties of the trustee in liquidations are similar to those in reorganization
except that the focus is on a realization of assets and liquidation of liabilities rather than on preservation
and continuation of business. In addition, the trustee must assume control over the assets of the debtor,
convert assets into cash, and liquidate the business as expeditiously as is compatible with the best interests
of affected parties. In the course liquidation, the trustee may continue business activities, if that is in the
interest of an orderly liquidation.
Accounting and Reporting for Liquidation. The basic focus of accounting for a bankrupt is that of a
“quitting concern” rather than a “going concern,” which is the usual assumption in accounting. The
statement that has been devised for that purpose is the statement of affairs, which is hypothetical or pro-
forma in nature and which represents the best estimate on the outcome of the liquidation of a debtor’s
business.
1. Statement of Affairs. This statement is prepared as of a given point in time for a business enterprise
entering into the stage of liquidation. The purpose of this statement is to display the assets and
liabilities and of the debtor enterprise from a liquidation viewpoint, because liquidation is the
outcome of the bankruptcy proceedings. Thus, assets displayed in the statement of affairs are
valued at current fair values; carrying amounts are presented on a memorandum basis.
2. Statement of Realization and Liquidation. This is an activity statement that is intended to show
progress, i.e., actual transactions toward the liquidation of a debtor’s estate. Its original purpose is
to inform the bankruptcy court and interested creditors of the accomplishments of the trustee.
The Statement of Realization and Liquidation differs from the Statement of Affairs in the following respects:
1. The statement of realization and liquidation reports the actual liquidation results. In contrast, the
statement of affairs is of a pro-forma nature and is based on estimates rather than actual results.
2. The statement of realization and liquidation provides an ongoing reporting of the trustee’s activities
and is updated throughout the liquidation process. The statement of affairs is a summary of the
estimated results of a completed liquidation.
I
The unsecured creditors of Insolveca Corporation filed a petition on July 1, 20x8 to
force Insolveca Corporation into bankruptcy. The court order for relief was granted on
July 10 at which time an interim trustee was appointed to supervise liquidation of the
estate. A listing of assets and liabilities of Insolveca Corporation as of July 10,
20x8, along with estimated realizable values, is as follows:
A life spent in making mistakes is not only more honorable but more meaningful than a life spent doing
nothing.
Life can only be understood backwards, but it must be lived forwards.
***Success is not a gift, it is a challenge to what you achieved***
***Achievement comes from the person who dares***
***To achieve all that is possible, we must attempt the impossible***
Success does not depend on what you achieved but on how you achieved it.
*Faith may be defined briefly as an illogical belief in the occurrence of the impossible.*
*Faith is a higher faculty than reason.*
*The secret of life is not just to live, but to have something worthwhile to
*Be not afraid of life. Believe that life is worth living and your belief will help create the fact.*
*Develop an attitude of gratitude, and give thanks for everything that happens to you, knowing that
every step forward is a step toward achieving something bigger and better than your current situation.*
*The remarkable thing we have is a choice every day regarding the attitude we will embrace for that
day. We cannot change our past... We cannot change the fact that people will act in a certain way. We
cannot change the inevitable.
The only thing we can do is play on the one string we have, and that is our attitude.*
GOD BLESS AS ALWAYS!!!
*The only way to find the limits of the possible is by going beyond them to the impossible.*
*Nothing great will ever be achieved without great mean, and men are great only if they are determined to be so.*