Page 117 - Bankruptcy and Reorganization Services

Fresh-Start Reporting

Companies emerging from bankruptcy must determine whether they meet the criteria for the adoption of
fresh-start reporting. FASB ASC 852 requires companies emerging from Chapter 11 reorganization to
adopt fresh-start reporting if the following two conditions are met: fn 9

1. The reorganization value of the assets of the emerging entity immediately before the date of con-
firmation is less than the total of all postpetition liabilities and allowed claims and

2. holders of existing voting shares immediately before the confirmation receive less than 50% of
the voting shares of the emerging entity.

FASB ASC 852 notes that the loss of control contemplated in the plan must be substantive and not tem-
porary.

Under fresh-start reporting, the reorganization value of the entity shall be assigned to the entity’s assets
and liabilities in conformity with the procedures specified in FASB ASC 805-20. If any portion of the
reorganization value cannot be attributed to specific tangible or identified intangible assets, such
amounts shall be reported as goodwill in accordance with FASB ASC 350-20-25-2. fn 10 Accordingly,
the adoption of fresh-start reporting results in a new reporting entity with no beginning retained earnings
or deficit. fn 11 Entities emerging from bankruptcy should apply fresh-start reporting as of the plan con-
firmation date. If material conditions precedent to the plan becoming effective exist, fresh-start reporting
should be applied when the material conditions are satisfied, but no later than the effective date of the
plan. fn 12

Under fresh-start reporting, the reorganization value is treated as if it were the acquisition price, or con-
sideration transferred, in a business combination under FASB ASC 805, Business Combinations. Alt-
hough no longer authoritative, paragraph 58 of SOP 90-7 provided important insight into the differences
between reorganization value and fair value by stating that "reorganization value can be a more objec-
tive measure of fair value than a purchase price in a business combination." 13 Two reasons are given for
this conclusion:

1. The purchase price in a non-bankruptcy business combination may exceed the fair value of the
acquired entity because the purchase price may be influenced by a variety of factors unrelated to
the entity.

2. In the reorganization process, extensive information available to the parties in interest, the adver-
sarial negotiation process, the involvement of the bankruptcy court, the use of specialists, and the

fn 9 FASB ASC 852-10-45-19.

fn 10 FASB ASC 852-10-45-20(a).

fn 11 FASB ASC 852-10-45-21.

fn 12 Paragraphs 17–18 of FASB ASC 852-10-45.

13 SOP 90-7, paragraph 58 (note: this language was not incorporated into the FASB ASC 852).

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