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Chapter 14

Additional Reorganization Value and Plan Confirmation Valuation Issues

Some of the most complex and challenging valuation issues that arise in the context of a bankruptcy re-
late to plan confirmation. Of particular importance is the assessment of the debtor’s reorganization val-
ue. The techniques and methods set forth in chapters 7–12 of this practice aid contain significant guid-
ance in developing an estimate of a debtor’s reorganization value. This chapter of the practice aid con-
tains some additional issues for consideration in developing an estimate of a debtor’s reorganization val-
ue.

Some of the issues and techniques covered extend beyond the assessment of a debtor’s reorganization
value in that they are likely applicable to the valuation of any highly leveraged entity. Also, the issues
covered in this chapter do not represent all unique issues that may be encountered when assessing a
debtor’s reorganization value or the various techniques that may be employed to address the issues.

FASB Accounting Standards Codification (ASC) 852, Reorganizations, defines reorganization value as
follows: "Reorganization value generally approximates fair value of the entity before considering liabili-
ties and approximates the amount a willing buyer would pay for the assets of the entity immediately af-
ter the restructuring."

For financial reporting purposes, reorganization value is therefore the enterprise value on a going con-
cern basis. This is also the definition generally used for bankruptcy reorganizations.

Enterprise value on a going concern basis is generally considered the most meaningful directive when
assessing reorganization value, but it is important to consider that, although enterprise value captures the
value of all assets of the debtor, it typically considers the value of net working capital (current assets
minus current liabilities) in this determination. Consider that the debtor’s prepetition current liabilities
will either be satisfied in full or in part (which may include, among other things, cash payment, stock in
the reorganized debtor, or repayment over time) or discharged as of the effective date of the plan. How-
ever, the analyst should be mindful that the debtor would have incurred postpetition current liabilities
that would be relevant in assessing the debtor’s net working capital in the context of assessing reorgani-
zation value. Accordingly, care must be given to determine whether an adjustment for excess working
capital or a working capital deficiency should be made when determining reorganization value.

In most bankruptcy reorganizations, the most useful reorganization value estimate is one that derives the
total asset value (or value of invested capital) of the debtor as opposed to a value estimate that derives
the value of the debtor’s equity directly. fn 1 This is the case because claimants and holders of interests
are negotiating over how much of the reorganized entity’s value each will retain (either through the
payment of cash, retention of debt, issuance of new debt, or issuance of an equity stake in the reor-

fn 1 Within this chapter of the practice aid, reference to assets means total assets as opposed to net assets. Valuing total assets is the
same as valuing total invested capital. Referring to total assets references the left side of the balance sheet, whereas referring to total
invested capital references the right side of the balance sheet. FASB Accounting Standards Codification (ASC) 852, Reorganizations,
refers to this value as reorganization value.

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