1 / 32

CHAPTER 19

CHAPTER 19. BANKRUPTCY REORGANIZATIONS AND LIQUIDATIONS. FOCUS OF CHAPTER 19. Bankruptcy Statutes Bankruptcy Reorganizations Liquidations Accounting by Trustees. Bankruptcy Statutes: Their Significance.

gigi
Download Presentation

CHAPTER 19

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 19 BANKRUPTCY REORGANIZATIONS AND LIQUIDATIONS

  2. FOCUS OF CHAPTER 19 • Bankruptcy Statutes • Bankruptcy Reorganizations • Liquidations • Accounting by Trustees

  3. Bankruptcy Statutes: Their Significance • Under the bankruptcy statutes, a company is placed under the protection 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.

  4. Bankruptcy Statutes: Their Significance • When a corporation is in bankruptcy proceedings, the bankruptcy judge controls the company. • A subsidiary in bankruptcy proceedings cannot be consolidated by its parentbecause the parent has lost control.

  5. Bankruptcy Statutes: Applicability • Thebankruptcy statutes apply to: • Individuals. • Partnerships. • Corporations. • Municipalities.

  6. Bankruptcy Statutes: Applicability • Thebankruptcy statutes do not apply to: • Insurance companies. • Certain financial institutions, such as banks and savings and loans, which are subject to alternative regulations.

  7. Bankruptcy Statutes: Types of Petitions • A company can file for bankruptcy protectionby 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 orgiven possession of its property to a custodian.

  8. 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 creditorswith regard to payment.

  9. Bankruptcy 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). • Depositsby individuals. • Taxes.

  10. 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.”

  11. Bankruptcy Statutes: Chapter 11 Vs. Troubled Debt Restructuring • Filing for bankruptcy reorganizationis 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. 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 entityand • A new entity.

  18. 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.

  19. 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 entity immediately afterthe restructuring. #1

  20. 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 evaluated periodically for impairment). #2 #3

  21. Chapter 11 BankruptcyReorganizations: SOP 90-7 • Under SOP 90-7, the “old entity” prior tothe confirmation date is to report: • Bankruptcy related losses and expenses in a separate “REORGANIZATIONS ITEMS” category in its statement of operations.

  22. 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 liabilitiesin the following specified categories: • PRE PETITION liabilities subject to compromise, • PRE PETITION liabilities notsubject to compromise (priority), and • POST PETITION liabilities (priority).

  23. Chapter 7 Bankruptcy Liquidations • In a Chapter 7 filing (for liquidation). the court usually appoints a trustee to liquidate the company. • Trustees have the power tovoidfraudulent and preferential transfers made by the debtor within certain specified periods preceding the filing date.

  24. Chapter 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 canexpect to receive on liquidation of the company. • This is a pro forma (“as if ”) statement.

  25. Accounting 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).

  26. Review 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.

  27. Review Question #1With 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.

  28. Review 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.

  29. Review Question #2With 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.

  30. Review 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.

  31. Review Question #3With 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.

  32. End of Chapter 19 Time to Clear Things Up—Any Questions?

More Related