Page 123 - Bankruptcy Volume 1

Chapter 16

Financial Reporting on Emergence from Chapter 11

Scope and Timing

FASB ASC 852 applies to all companies that reorganize under Chapter 11, regardless of whether or not
the requirements for fresh-start accounting (current value balance sheet with prior earnings or deficit
eliminated) are met.

The reorganized debtor must reflect in its financial statements the terms of the plan confirmed by the
court. Paragraphs 19–29 of FASB ASC 852-10-45 provide guidance on how to account for the emer-
gence from Chapter 11 when fresh-start reporting applies and when it does not apply.

Entities whose plans have been confirmed by the court and have emerged from Chapter 11 should apply
the reporting principles covered by FASB ASC 852 as of the confirmation date or as of a later date when
all material conditions precedent to the effectiveness of the plan are resolved. However, financial state-
ments prepared as of a date after the parties in interest have approved a plan through the voting process
and issued after the plan has been confirmed by the court should report the effects of the plan if there are
no material unsatisfied conditions. fn 1 If both the confirmation date and the effective date are expected
to occur after the date the financial statements are issued and the parties in interest have approved the
plan through the voting process prior to issuance, the debtor is encouraged to provide pro forma disclo-
sure reflecting the effects of the plan of reorganization, provided there are no material unsatisfied condi-
tions.

The effects of the forgiveness of debt and adjustments on assets and liabilities resulting from the adop-
tion of fresh-start reporting should be recorded in the debtor’s final statement of operations prior to
emerging from Chapter 11. These adjustments should be presented in the debtor’s statement of opera-
tions as reorganization items.

Requirements for Fresh-Start Reporting

Under fresh-start reporting, the debtor uses fair value (going-concern or reorganization values) in its
balance sheet for both assets and liabilities and eliminates all prior earnings or deficits. FASB ASC 852
requires debtors emerging from Chapter 11 to adopt fresh-start reporting if

 the reorganized value of the emerging entity immediately before the confirmation of the plan is
less than the total of all postpetition liabilities and allowed claims, and

 holders of existing voting shares immediately before confirmation retain less than 50% of the
voting share of the emerging entity.

fn 1 If for the purposes of quarterly reporting, due to the timing of plan confirmation, it is impractical to apply fresh-start reporting to
the historical financial statements, pro forma financial information may be provided to satisfy this requirement. In addition, an extend-
ed delay between the confirmation date and the effective date is presumed to be attributed to a material condition.

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