Page 118 - Bankruptcy and Reorganization Services

fact that all elements of the determination are focused solely on the economic viability of the
emerging entity result in an objective and reliable determination of reorganization value. fn 14

As such, once the plan of reorganization is confirmed by the bankruptcy court, the reorganization value
serves as the basis for the balance sheet restatement under fresh-start reporting. Depending on the opera-
tions of the entity, the reorganization value may need to be allocated to more than one component, called
a reporting unit, in accordance with FASB ASC 350, Intangibles—Goodwill and Other, before any val-
ue can be assigned to individual assets and liabilities. fn 15

Valuation Approach

The focus of a valuation analysis for fresh-start reporting is to estimate the fair values of the identifiable
assets and liabilities of the reorganized entity. Under FASB ASC 852, the premise of value for the reor-
ganization value is going concern value, and the standard of value under FASB ASC 805 is fair value.
Together these two accounting standards prescribe the assumptions that should be used to determine the
values of the individual assets and liabilities: fair value on a going concern premise. The business as-
sumptions used to estimate the values of the assets and liabilities should also be consistent with the as-
sumptions used to determine the reorganization value of the emerging entity.

The approach used to value each identifiable asset and liability will depend on the nature of the asset or
liability and the nature of the business of the emerging entity. The valuation approaches used to value
individual assets and liabilities for fresh-start reporting are the income, market, and asset approaches,
which are discussed in chapter 9 under "Asset (Asset-Based) Approach."

As discussed previously, the reorganization value may need to be allocated to more than one reporting
unit, if certain conditions are met. fn 16 If it is necessary to allocate the reorganization value to reporting
units, the methodologies and assumptions used to determine the respective values of each reporting unit
should be consistent with the economic factors that drive the value of each reporting unit. The assump-
tions used to determine the respective values of each reporting unit should also be consistent with the
economic and business assumptions used to determine the reorganization value of the entity.

Valuation Timing Issues

An issue that can arise when using the reorganization value to implement fresh-start reporting is that the
reorganization value may have been determined as of a date that is prior to the plan confirmation date.
The delay between the valuation date used for the reorganization value and the confirmation date may be
significant. This delay can result in differences between the business conditions of the entity and the
general conditions in the industry and economy that were factored into the reorganization value and the
conditions that exist as of the confirmation date. These differences can cause there to be a difference be-
tween the reorganization value and the value of the entity upon emergence.

fn 14 Ibid.

fn 15 FASB ASC 350-20-35.

fn 16 Paragraphs 33–46 of FASB ASC 350-20-35.

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