chapter 23
DESCRIPTION
CHAPTER 23. BANKRUPTCY REORGANIZATIONS AND LIQUIDATIONS. FOCUS OF CHAPTER 23. Bankruptcy Statutes Bankruptcy Reorganizations Liquidations Accounting by Trustees. Bankruptcy Statutes: Their Significance. - PowerPoint PPT PresentationTRANSCRIPT
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23 CHAPTER 23
BANKRUPTCY REORGANIZATIONS
AND LIQUIDATIONS
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23FOCUS OF CHAPTER 23
Bankruptcy Statutes Bankruptcy Reorganizations Liquidations Accounting by Trustees
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23Bankruptcy Statutes: Their Significance
Under the bankruptcy statutes, acompany is placed under theprotection of the bankruptcy court.This means that: Creditors are prevented from taking
legal action individually otherwise available to them.
Creditors’ legal rights are thus suspended for an indefinite period.
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23Bankruptcy Statutes: Their Significance
When a corporation is inbankruptcy proceedings, the bankruptcy judgecontrols the company.
A subsidiary in bankruptcy proceedings cannot be consolidated by its parentbecause the parent has lost control.
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23Bankruptcy Statutes: Applicability
The bankruptcy statutes apply to: Individuals.
Partnerships.
Corporations.
Municipalities.
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23Bankruptcy Statutes: Applicability
The bankruptcy statutes do not apply to: Insurance companies. Certain financial institutions, such
as banks and savings and loans, which are subject to alternative regulations.
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23Bankruptcy Statutes: Types of Petitions
A company can file for bankruptcy protection
by filing a voluntary petition. A company’s creditors can file an
involuntary petition if the debtor: Is generally NOT paying its debts as they
become due or Has appointed a custodian or given
possession of its property to a custodian.
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23 Bankruptcy Statutes: Creditors With Priority
A special class of creditors created by the bankruptcy statutes is called “creditors with priority.”
These creditors are given statutory priority over the claims of other
unsecured creditors with regard to payment.
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23Bankruptcy Statutes: Creditors With Priority
Creditors Claims With Priority: Administrative expenses related to the
bankruptcy proceeding (postpetition claims).
Wages, salaries, and commissions earned within 90 days before the bankruptcy filing (up to $4,000 per employee).
Employee benefit plan claims (specified). Deposits by individuals. Taxes.
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23 Bankruptcy Statutes: Chapter 7 Vs. Chapter 11
Chapter 7 of the Bankruptcy Statutes: Deals with liquidations:
Sell the assets, pay the creditors, close down the business.
Chapter 11 of the Bankruptcy Statutes: Deals with reorganizations:
Certain debts are forgiven & the company is able to get a “fresh start.”
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23 Bankruptcy Statutes: Chapter 11 Vs. Troubled Debt Restructuring
Filing for bankruptcy reorganization is a
last resort short of liquidation. Most companies prefer to attempt a
troubled debt restructuring outside of the bankruptcy court. Advantages are: Can be done in far less time. Avoids the stigma of having gone
through bankruptcy proceedings.
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23 Chapter 11 BankruptcyReorganizations: Management’s Role
In a Chapter 11 bankruptcy filing,the debtor’s management usually: Continues to manage and operate the
company. Develops a plan of reorganization,
to be submitted to creditors and the bankruptcy court.
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23 Chapter 11 BankruptcyReorganizations: Debt Forgiveness
If the creditors approve of any plan of reorganization, certain debt is forgiven. Formally, this is referred to as a
“discharge of indebtedness.” Certain debt cannot be discharged under
the bankruptcy statutes, such as: Taxes Debt incurred under false
pretenses.
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23 Chapter 11 BankruptcyReorganizations: Accounting Issues
The Accounting Issues: How to calculate whether
any debt has been forgiven. This issue includes whether
interest should be imputed. How to report a forgiveness of debt.
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23 Chapter 11 BankruptcyReorganizations: Accounting Issues
These are the identical issues that exist in troubled debt restructurings., which are governed by FAS 15.
However, the AICPA’s SOP 90-7, which applies exclusively to bankruptcy reorganizations applies--NOT FAS 15.
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
The central idea of SOP 90-7 is that the entity that emerges from Chapter 11 be deemed a new entity for which fresh-start financial statements should be prepared.
No beginning retained earnings or deficit (deficits usually exist) is reported.
A small percentage of entities emerging from
Chapter 11 will not qualify for fresh-start accounting under SOP 90-7.
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
Under SOP 90-7, comparative financial statements that straddle a confirmation date cannot be presented because it would be an inappropriate comparison of: A former entity and A new entity.
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
Under SOP 90-7, any forgiveness of debt (“discharge of indebtedness”) is: Calculated by determining the
present value of amounts to be paid using appropriate current interest rates.
Reported as an extraordinary item in the predecessor entity’s final statement of operations.
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
Under SOP 90-7, all assets are restated to reflect their fair value at the date of reorganization. Three steps are required: Determining the “reorganization
value” of the entity--an amount that approximates what a “willing buyer”
would pay for the assets of the emerging entityimmediately after the restructuring.
#1
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
Allocating the reorganization value to the entity’s tangible and intangible assets.
Reporting any unallocated value as goodwill (subsequently to be evaluatedperiodically for impairment).
#2
#3
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
Under SOP 90-7, the “old entity” prior to the confirmation date is to report: Bankruptcy related losses and
expenses ina separate “REORGANIZATIONS ITEMS” category in its statement of operations.
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23 Chapter 11 BankruptcyReorganizations: SOP 90-7
Also under SOP 90-7, the “old entity” prior to the confirmation date is to report IN ANY BALANCE SHEETS ISSUED , its liabilities in the following specified categories: PRE PETITION liabilities subject to
compromise, PRE PETITION liabilities not subject
to compromise (priority), and POST PETITION liabilities (priority).
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23Chapter 7 Bankruptcy Liquidations
In a Chapter 7 filing (for liquidation). the court usually appoints a trustee to liquidate the company.
Trustees have the power to void fraudulent and preferential transfers made by the debtor within certain specified periods preceding the filing date.
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23Chapter 7 Bankruptcy Liquidations
In a Chapter 7 filing, a special statement (called the “statement of affairs”) is
prepared on a “quitting concern” basis.
This statement provides information concerning how much money each class of
creditors can expect to receive on liquidation of the company. This is a pro forma (“as if ”) statement.
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23Accounting By Trustees
If the court or creditors desire information that discloses the trustee’s responsibility for the book balances existing when the trustee
was appointed, a statement of realization and liquidation can be prepared. This is a historical statement in its
entirety (nothing pro forma about it).
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23Review Question #1
Which accounts are adjusted to a zero balance in a bankruptcy reorganization that qualifies for fresh start accounting ?
A. Accumulated depreciation. B. Additional Paid-in Capital. C. Retained Earnings. D. Accumulated Deficit. E. None of the above.
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23Review Question #1--With Answer
Which accounts are adjusted to a zero balance in a bankruptcy reorganization that qualifies for fresh start accounting ?
A. Accumulated depreciation. B. Additional Paid-in Capital. C. Retained Earnings. D. Accumulated Deficit. E. None of the above.
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23Review Question #2
Which classifications are NOT used in a debtor’s balance sheet issued prior to adopting fresh start accounting in a bankruptcy reorganization? A. Prepetition liabilities--subject to compromise.B. Prepetition liabilities--not subject to compromise.C. Postpetition liabilities--subject to compromise.D. Postpetition liabilities--not subject to compromise.
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23Review Question #2--With Answer
Which classifications are NOT used in a debtor’s balance sheet issued prior to adopting fresh start accounting in a bankruptcy reorganization? A. Prepetition liabilities--subject to compromise.B. Prepetition liabilities--not subject to compromise.C. Postpetition liabilities--subject to compromise.D. Postpetition liabilities--not subject to compromise.
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23Review Question #3
How is a discharge of indebtedness in a bankruptcy reorganization that qualifies for fresh start accounting reported? A. Extraordinary item in old entity’s statements. B. Extraordinary item in new entity’s statements. C. A credit to Additional Paid-in Capital.D. A credit directly to Retained Earnings.E. An item in Other Comprehensive Income.
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23Review Question #3--With Answer
How is a discharge of indebtedness in a bankruptcy reorganization that qualifies for fresh start accounting reported? A. Extraordinary item in old entity’s statements. B. Extraordinary item in new entity’s statements. C. A credit to Additional Paid-in Capital.D. A credit directly to Retained Earnings.E. An item in Other Comprehensive Income.
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23End of Chapter 23
Time to Clear Things Up--Any Questions?