The main features of the new rules on the liquidation of the corporation

The new rules of the voluntary liquidation of corporations, introduced by law in the Civil Code of the company law reform (Legislative Decree no. No. 6/2003) contains several new features, including the following that have direct relevance to the management and liquidation budgets and financial reports to be drawn up at this stage of the life of society:

a) has disappeared available on the prohibition of new business, which had aroused much discussion in the literature regarding its scope; Today the liquidators have the power to take all "acts votes" for the liquidation of the company and not just "acts necessary" as required by art. 2278 (still in force for partnership). They, therefore, according to the prevailing doctrine can also perform operations such as organizational contributions, mergers, demergers, transformations, capital increases and other measures aimed at preserving the value of the company and the best possible realization of its activities;

b) for the whole enterprise, or for one or more of its branches, can be placed by the shareholders exercising temporary or the adoption of other acts necessary for the preservation of its value (such as rent of company ) according to the "best realization" (and thus to avoid that part of the value consists of goodwill and other intangible assets is reduced or vanishes);

c) have been clarified the powers of the directors in the period between the occurrence of a cause of dissolution and the date of the delivery to the liquidators, during which they retain the power to run the company "for the sole purpose of preserving the integrity and of the value of corporate assets. In this period, therefore, continues the company's activities and can also be carried out "new business" that the 1st paragraph of art. 2449 in the text previously in force is not allowed;

d) is expressly provided what the subject of delivery to the liquidators: corporate books (and accounting), management reporting for the last period before the management of the liquidation, the situation of the accounts on the date of effect of the dissolution of the company; first document that was not expected and which is not part of the "management report" (which, as will be seen, is a real interim ordinary budget drawn up with reference not to the "date of dissolution" but the next date of the publication of the appointment of liquidators, which starts the management of liquidation). Deliveries can not be made prior to enrollment in the commercial register of the appointment and powers of liquidators;

Principles and basis of preparation of financial statements for liquidation.

In view of national accounting standards and international accounting standards of the IASB -International Accounting Standards Board there is no document indicating the principles and basis of preparation of financial statements and other accounting records in liquidation.

In the US, the most important organizations of the accounting profession in that country (AICPA - American Institute of Certified Public Accountants) has developed some application documents specifically related to provisions of the Bankruptcy Code on liquidation and restructuring of enterprises.


In our country, the law of the company law reform (Legislative Decree no. No. 6/2003 and two subsequent corrective decrees) introduced for the first time in the voluntary liquidation of the corporation, with effect from 1 January 2004, a discipline of financial statements and other accounting documents of the settlement with an organic and completeness before unknown to the Civil Code of 1942, which merely referred to the few, disorganized, provisions dictated in terms of partnerships (and in particular, of simple partnership ).
The most important principle introduced by the new regulations and contained in Articles novellati.

2484-2496 of the Civil Code (and in particular in the new art. 2490 "Financial Reporting in liquidation") is that the criteria for the preparation of financial statements "intermediate" or annual clearance (and in particular, the criteria for valuation of assets and liabilities and determination of the annual results of operations) are very different from those for the regular budget for the year. Principle that the prevailing doctrine had proven successful in few decades and that was implicit in the disappearance in liquidation of the validity of the fundamental postulate of "going concern" art. 2423-bis, paragraph 1, n. 1 commercial code. Another new feature of great importance is to have foreseen explicitly the possibility of a temporary operation of the business, or individual branches of it, even to the preservation of its value and the best realization of the subsequent transfer. In this case, as will be seen below, the art. 2490 requires a separately shown in the balance sheet of assets and liabilities and financial company that continues its activities and the adoption of evaluation criteria other than those applicable remaining assets and liabilities.

The purpose of this document is to identify the type and characteristics of financial statements and other accounting documents required by those provisions and to establish what their criteria for drawing. These are the following financial reports: management report of the directors; situation accounts on the date of effect of the dissolution of the company; interim or annual liquidation and attachments; the final liquidation and distribution plan.

The document relates primarily direct and voluntary liquidation of the corporation and therefore, in general, the provisions contained in Articles 2484 to 2496 of the Civil Code, even if the specific provisions relating to the accounting records of the settlement are contained only in articles. 2487-bis, 2490, 2491, 2492 and 2493.

But the document also covers the financial statements prepared by companies lucrative clearance of people and Cooperative Societies, having to apply to them, directly under the calls of the law, or by analogy, the discipline of the financial statements contained in the standards mentioned above. This document is also intended specifically to Italian companies that prepare financial statements in accordance with the provisions of the Civil Code and to national accounting standards. The guidelines contained in the document may also be followed by the insurance companies consistent with the special rules of the sector dictated by the Insurance Code.

However, the Italian companies that prepare their financial statements with international accounting standards, in accordance with Regulation no. 1606/2002 and Legislative Decree. N. 38/2005 are obliged, upon the occurrence of one of the causes of dissolution provided by art. 2484 cc, to apply the provisions on the liquidation of the Civil Code; also because, as noted, in the IAS / IFRS endorsed by European Commission there is no document on the budgets in the process of liquidation.

The preparation of financial statements of liquidation by the Italian company which by law or by choice prepare their financial statements using the IAS / IFRS, pursuant to Legislative Decree. N. 38/2005, will be dedicated to a specific document accounting principles. This document was prepared in collaboration with the Commission for Accounting Standards of the National Board of Accountants and Bookkeepers.

Subjective and objective probability depends more on intuition and past experience

13. _____probability depends more on intuition and past experience than_____probability.

a.	Subjective; objective
b.	Objective; subjective
c.	Certainty; uncertainty
d.	none of these

ANS:  A                   

   14.   _____probability depends more on past records and facts than_____probability.

a.	Subjective; objective
b.	Objective; subjective
c.	Certainty; uncertainty
d.	none of these

ANS:  B                   

   15.   The likelihood that a decision will be implemented and that it will lead to the harm or benefit predicted is referred to as ______.

a.	probability
b.	temporal immediacy
c.	proximity
d.	risk

ANS:  D                       

   16.   Decision making under conditions of certainty _____.

a.	is a difficult situation for most leaders.
b.	is the exception for most leaders.
c.	is the norm for most leaders.
d.	causes excess stress for leaders involved.

ANS:    B

What is organizational diagnosis? Reasons for individual and organizational resistance to change.

Individuals may resist change because of their perceptions or personalities. In addition, habits, fear of the unknown, economic insecurities, and threats to established power and influence relationship may generate further resistance to change. Organizational resistance to change may be caused by organizational structure and culture, resource limitations, and interorganizational agreements. Force field analysis can help managers and employees diagnose and overcome resistance to change. Resistance can also be reduced through open communication and high levels of employee participation in the change process.


Organizational diagnosis is the process of assessing the functioning of the organization, department, team, or job to discover the sources of problems and areas for improvement. An accurate, valid diagnosis of current organizational functioning, activities, and problems is an essential foundation for effective organizational change. The readiness for change, availability of resources for change, and possible resistance to change are among the factors that should be accurately diagnosed.

Items frequently comprised in the estate principal

The assets of the estate are referred to as the principal or corpus of the estate. In identifying the principal, the fiduciary must identify, or inventory, those assets that were the legal property of the decedent at the time of death. Therefore, the assets will include accrued items such as interest and rents. Items frequently comprising the estate principal include the following:

1. Cash on hand and in bank accounts.
2. Investments such as stocks, bonds, mutual funds, retirement accounts, money market funds, and survivorship annuities.
3. Accrued interest and declared dividends on the above investments as of the decedent’s death.
4. Capital interests in businesses, such as closely held corporations, partnerships, and/or sole proprietorships.

5. Life insurance proceeds that are receivable by the estate, receivable by another for the benefit of the estate, or the result of the decedent having an ownership interest in the insurance policy. Therefore, if the decedent or the estate has an “incident of ownership,” the proceeds are included in the estate.
6. Investments in real estate, including accrued rents at the date of the decedent’s death.
7. Intangible assets, such as patents and royalties, including related accrued income at the date of the decedent’s death.
8. Loans or notes receivable, including accrued interest at the date of the decedent’s death.
9. Unpaid wages and other forms of earned income accruing to the decedent at the date of the decedent’s death.
10. Personal valuables, including furniture, fixtures, jewelry, vehicles, boats, and collectible items such as coins, stamps, and artwork.

It is important to note that the preceding inventory of the principal is not reduced by the liabilities of the decedent. These obligations are recognized when they are paid or satisfied through the distribution of estate principal.

How to Identify Claims against the Probate Estate

The discovery and identification of claims against the decedent’s estate is of equal importance to the discovery and identification of estate principal. Notification of the decedent’s death is required by law, and valid claims must be identified within a prescribed period of time. The fiduciary must evaluate the validity of claims and place them in an order of priority for payment purposes. The order of priority varies from state to state; however, an example might be to observe the following order of priority:

1. Claims having a special lien against property, but not to exceed the value of the property.

2. Funeral and administrative expenses.

3. Taxes: income, estate, and inheritance.

4. Debts due the United States and various states.

5. Judgments of any court of competent jurisdiction.

6. Wages due domestic servants for a period of not more than one year prior to date of death and medical claims for the same period.

7. All other claims.

Similarities between trust accounting and the accounting for an estate

The accounting for a trust is very similar to the accounting for an estate. The distinction between principal and income must be maintained through the use of trust principal and trust income accounts. The trust agreement should provide direction regarding how income is to be determined. A charge and discharge statement is required periodically for both trust principal and income.


To demonstrate adherence to the terms of the trust, the trustee must provide annual, confidential reports to income beneficiaries and remaindermen. For a testamentary trust, a report also must be rendered to the probate court of the county in which the will was admitted to probate.

The nature of the report is dependent upon the statutory requirement of the relevant state. Generally within 30 days after the end of each year, a report must be filed that shows:

1. The trust principal on hand at the beginning of the period.
2. Changes in the trust principal during the period, such as asset acquisitions or dispositions.
3. The trust principal on hand at the end of the period, its composition, and the estimated fair values of all investments.

As to trust income, the report shows:
1. The trust income on hand at the beginning of the period.
2. Trust income received during the period, detailing the sources and amounts.
3. Distributions of trust income made during the period to income beneficiaries.
4. The trust income on hand at the end of the period and how it is invested.

These requirements may be met by the periodic filing of a charge and discharge statement, provided that sufficient detail as to principal and as to income is incorporated into the report. At the time of submitting the statement to the court, many trustees prefer to close trust books to have them correspond to the annual time frame used in filing reports. Trust Principal andTrust Income are the clearing accounts used in the closing process, paralleling the procedures for closing an estate.

Priorities for Unsecured Claims in Statement of Affairs

Priorities for Unsecured Claims. An order of priority to receive distributions from amounts available to meet unsecured claims has been established by the Act. Each class must be paid in full or provided for before any amount is paid to the next lower class. When the amount is inadequate to pay all claims of a given class, the amount is distributed on a pro rata basis within that class.

When the amount is sufficient to pay the claims of all classes, which is highly unlikely, the excess amount is returned to the debtor. The order of priority for allowed unsecured claims is as follows: 

Class 1—Expenses to administer the estate. Those who administer the estate should be assured of payment; otherwise, competent attorneys and accountants would not be willing to participate.

Class 2—Debts incurred after the commencement of a case of involuntary bankruptcy but before the order for relief or appointment of a trustee. These items, referred to as “gap” creditors, are granted priority in order to permit the business to carry on its operations during the period of legal proceedings.

Class 3—Wages (salaries or commissions) up to $4,000 per individual, earned within 90 days before the filing of the petition or the cessation of the debtor’s business, whichever occurs first.

Class 4—Unpaid contributions to employee benefit plans, arising from services performed up to 180 days prior to filing the petition, to the extent of $4,000 per employee covered by the plan.

Class 5—Deposits up to $1,800 each for goods or services never received from the debtor. 

Class 6—Tax claims of a governmental unit. These taxes are nondischargeable (i.e., they still must be met by the debtor after the termination of the case).

Class 7—Claims of general creditors not granted priority. All remaining unsecured claims fall into this category.

How to do the Valuation of Estate Assets?

Valuation of Estate Assets
Fair value must be established for assets included in an estate. Some valuations, such as the values of stocks and bonds traded on recognized exchanges, pose no problems. For other assets, such as property, jewelry, art objects, or antiques, a competent appraisal in writing should be obtained. Assets are included in the estate at their fair value on the date of death or on an alternate valuation date, if the executor or administrator so elects. If the alternate valuation date is elected, all estate property must be valued as of six months after the decedent’s death, except for property sold, distributed, or otherwise disposed of during the 6-month period. Such property is valued as of the date of disposition. The alternate valuation date may be used only if it would reduce the total gross estate and decrease the estate tax liability. The alternate valuation date protects estates if there should be a significant decrease in property values during the 6-month interval.

Formerly, it would have been possible for a fiduciary, knowing that there would be no estate tax to pay, to select the alternate valuation date if assets increased in value, thereby giving the heirs a higher basis for their inherited property, at no cost to the estate. To prevent this windfall, Congress took an action that permitted election of the alternate valuation date only if it would reduce the total gross estate and decrease the estate tax liability.

Congress felt it was being sufficiently generous by permitting a stepped-up basis. Recall that, to the recipient, the basis of property acquired from a decedent is fair value on the date of death or alternate valuation date. That regulation may result in a step-up of basis. For example, assume Jane Jacoby held stock with a cost of $100,000. At the date of her death, it was worth $500,000 and was willed to her nephew, whose basis now becomes $500,000. A subsequent sale by him for $500,000 would result in no taxable gain. Although the value of the stock must be included in the inventory of the estate, which would be subject to the unified transfer tax only if the estate is large enough, the $400,000 gain would escape federal income taxation because of the stepup in basis. If Jane had sold the stock before her death, the gain would have been subject to income tax. Tax planning would suggest that, if possible, property that has appreciated substantially in value should be held as part of an estate because of the advantage of the step-up in basis. The opposite is true if there is a substantial decline in value. If Jane’s stock had a value of $5,000 on the valuation date, that would become the basis to her nephew. Neither he nor the estate would derive any income tax benefit from the $95,000 loss in value. If Jane had sold the stock prior to death, benefits resulting from the deductibility of the loss for income tax purposes would have materialized.

What are the contents of Liquidators’ statement of account?

The statement prepared by the liquidator showing receipts and payments of cash in case of voluntary winding up is called “Liquidators’ statement of account” (Form No. 156 Rule 329 of the Companies Act, 1956). There is no double entry involved in the preparation of liquidator’s statement of account. It is only a statement though presented in the form of an account.

While preparing the liquidator’s statement of account, receipts are shown in the following order :
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if any, is entered as ‘surplus from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay necessary amount (not exceeding the amount of uncalled capital) if creditors’ claims/claims of preference shareholders can’t be satisfied with the available amount. Preference shareholders would be called upon to contribute (not exceeding the amount as yet uncalled on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are shown on the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.

Payments made to redeem securities and cost of execution and payments per Trading Account are deducted from total receipts.

Payments are made and shown in the following order :
(a) Legal charges;
(b) Liquidator’s expenses;
(d) Debentureholders (including interest up to the date of winding up if the company is insolvent and to the date of payment if it is solvent);
(e) Creditors :
(i) Preferential (in actual practice, preferential creditors are paid before debenture holders having a floating charge);

(ii) Unsecured creditors;
(f) Preferential shareholders (Arrears of dividends on cumulative preference shares should be paid up to the date of commencement of winding up); and
(g) Equity shareholders.

When can a company do Override preferential payments?

The Companies (Amendment) Act, 1985 introduced Section 529A which states that certain dues are to be settle in the case of winding up of a company even before the payments to preferential creditors under Section 530. Section 529A states that in the event of winding up of a company, workmen’s dues and debts due to secured creditors, to the extent such debts rank under Section 529(1)(c), shall be paid in priority to all other debts. The debts provable [Section 529(i)(a)] and the valuation of annuities and future and contingent liabilities [Section 529(1)(b)] shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. Workmen’s dues, in relation to a company, means the aggregate of the following sums:

1. all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947;
2. all accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution;
3. all amounts due in respect of any compensation or liability for compensation under Workmen’s Compensation Act, 1923 in respect of death or disablement of any workman of the company;
4. all sum due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company.

Various modes of Troubled Debt Restructurings

A basic approach to resolving an inability to service debt is to seek some concessions or compromises from major creditors. A troubled debt restructuring is a process whereby creditors grant concessions to the debtor that they would not consider otherwise. However, both the debtor and creditor are faced with a difficult situation, and a restructuring offers the creditor the best opportunity to recover the debt, as compared to nonrestructuring alternatives. Although not all debt restructurings qualify as troubled debt restructurings, those that do generally take several forms. Troubled debt restructurings are discussed in FASB No. 15. The most common forms of restructuring, along with the appropriate debtor accounting, are summarized as follows:

Transfer of Assets in Full Settlement:
• Form: The debtor transfers assets, such as third-party receivables, real estate, and other assets, to the creditors in order to satisfy the debt either totally or partially.
• Accounting by Debtor: The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt, including related accrued interest, premiums, etc., and the fair value of the transferred assets. The restructuring gain should be classified as an extraordinary item, if material. The difference between the book value of assets transferred to the debtor and their fair value results in a gain or loss, which is not part of the gain on restructuring.

• Example: Assets with a book value of $100,000 and a fair value of $120,000 are transferred to a creditor in full settlement of a loan of $130,000 plus accrued interest of $2,000.

Granting an Equity Interest:
• Form: Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially.
• Accounting by Debtor: The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.
• Example: Preferred stock with a par value of $20,000 and a fair value of $120,000 is granted to a creditor in full settlement of a loan of $130,000 plus accrued interest of $2,000.

Modification of Terms:
• Form: The terms of the debt are modified in several possible ways involving interest and/or principal. Interest rates may be reduced and/or accrued interest may be reduced. The principal amount of the debt may be reduced and/or the maturity date of the loan may be extended.
• Accounting by Debtor: If the total future cash payments (both principal and interest) specified by the restructuring are less than the carrying basis of the debt, a gain on restructuring is recognized. The restructuring gain should be classified as an extraordinary item, if material. After recognizing the gain, all subsequent cash payments made per the terms of the restructuring should be accounted for as a reduction of the debt payable. Therefore, no interest expense shall be recognized on the restructured debt. If the total future cash payments (both principal and interest) specified by the restructuring are more than the carrying basis of the debt, no gain on restructuring is recognized. However, interest expense is recognized between restructuring and maturity. The interest recognized should be based on an effective interest rate that equates
the present value of restructured future cash payments to the carrying value of the debt.

• Example A: The terms of an outstanding debt of $130,000 plus accrued interest of $2,000 have been modified as follows: payments of $60,000 per year will be made over the next two years in full satisfaction of the debt.

Combination Restructurings:
• Form: A restructuring may involve some combination of the above restructuring features. 

• Accounting by Debtor: The accounting for a combination restructuring is the same as discussed above except that first, the carrying basis of the debt should be reduced by the fair market value of assets transferred and/or equity interests granted. This step does not result in the recognition of a gain on restructuring. Second, the remaining carrying basis of the debt is compared against the “modification of terms” portion of the restructuring and accounted for accordingly. 

• Example: Land with a fair value of $52,000 and a cost basis of $45,000 is transferred to a creditor in partial settlement of a debt of $130,000 plus accrued interest of $2,000. The balance of the debt is satisfied by the payment of $35,000 per year for each of the next two years.

Valuation of Goodwill in consolidating a subsidiary

Under this theory, only the parent’s ownership percentage of subsidiary accounts is adjusted to fair value. For example, when consolidating, a parent purchasing an 80% interest in a subsidiary would adjust subsidiary accounts for only 80% of the difference between recorded book and fair value. The 20% noncontrolling interest in subsidiary accounts would remain at book value. The currently used parent company theory produces a mixture of values on the consolidated balance sheet that is not easily understood or totally defendable. The consolidated balance sheet contains the following values for an 80%-owned subsidiary:

Accounts Valuation

Parent company accounts ---->Recorded book value
Subsidiary company accounts:
80% controlling interest portion ----- .Fair value on date of parent company purchase
20% non-controlling interest portion ----->Recorded book value

The FASB proposals would provide consistency for subsidiary accounts by requiring that all subsidiary accounts except possibly goodwill be recorded at full fair value regardless of the size of the non-controlling interest. No agreement has been reached on whether goodwill should be recorded on the non-controlling interest.

Both the FASB Exposure Draft and the later Working Draft applied variations of the economic unit concept to purchases of a subsidiary. Under the economic unit concept, all subsidiary accounts would be adjusted to 100% of their fair value, no matter what the level of parent ownership. 

Goodwill would also be recorded as it applied to the entire entity. Suppose that after all other accounts were adjusted to fair value on an 80% purchase, an excess on the 80% interest of $80,000 remained. Under the parent company theory, goodwill would be limited to $80,000. Under the economic unit concept, the $80,000 excess would be divided by 0.80 to impute total goodwill for the entity of $100,000.

What is Troubled Debt Restructurings?

A troubled debt restructuring is a process whereby creditors grant concessions to the debtor that they would not consider otherwise. However, both the debtor and creditor are faced with a difficult situation, and a restructuring offers the creditor the best opportunity to recover the debt, as compared to non-restructuring alternatives.Troubled debt re-structuring generally take several forms. The most common forms of restructuring, along with the appropriate debtor accounting, are summarized as follows:
 

Transfer of Assets in Full Settlement:
The debtor transfers assets, such as third-party receivables, real estate, and other assets, to the creditors in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt, including related accrued interest, premiums, etc., and the fair value of the transferred assets. The restructuring gain should be classified as an extraordinary item, if material. The difference between the book value of assets transferred to the debtor and their fair value results in a gain or loss, which is not part of the gain on restructuring.

Granting an Equity Interest:
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially.The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.

Granting an Equity Interest:
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.

Combination Restructurings:
A restructuring may involve some combination of the above restructuring features.The accounting for a combination restructuring is the same as discussed above except that first, the carrying basis of the debt should be reduced by the fair market value of assets transferred and/or equity interests granted. This step does not result in the recognition of a gain on restructuring. Second, the remaining carrying basis of the debt is compared against the “modification of terms” portion of the restructuring and accounted for accordingly.