Page 126 - Bankruptcy Volume 1

Debtors that meet both of the conditions that indicate fresh-start reporting will report the assets and lia-
bilities at their going-concern (reorganization) values.

Disclosure Statement Presentation

FASB ASC 852-10-05-15 recognizes that although the court determines the adequacy of information in
the disclosure statement, entities that expect to adopt fresh-start reporting should report information
about reorganization value in the disclosure statement. Reporting this value helps creditors and share-
holders make an informed judgment about the plan.

Some debtors’ counsel prefer not to disclose the reorganization value in a plan that has considerable op-
position or in which the debtor attempts to obtain approval without the support of one or more commit-
tees of creditors. Practitioners should recognize that the disclosure of the reorganization value may not
be nearly as critical as the disclosure of the debtor’s cash flow projections for the postconfirmation peri-
od. Once the cash flow projections are known, knowledgeable parties should be in a position to deter-
mine the reorganization value.

FASB ASC 852 suggests that the most logical place to report the reorganization value in the disclosure
statement is in a pro forma balance sheet that shows the financial position of the entity as though the
proposed plan was confirmed. If, at the time the disclosure statement is issued, the reorganization value
has not been allocated to individual assets, the debtor may include a separate line item in the pro forma
balance sheet to reflect the difference between the total reorganization value of the emerging entity and
the recorded amounts of individual assets. Whenever possible, however, reorganization value should be
segregated into major categories, such as the value attributable to intangible assets, and property and
equipment.

Allocation of Reorganization Value

For entities meeting the criteria discussed (reorganization value is less than liabilities, and preconfirma-
tion shareholders owning less than 50% of voting stock of the emerging entity), fresh-start reporting
should be implemented as follows.

Asset Values

The reorganization value is to be allocated to the emerged entity’s assets based on the fair value of the
individual assets. The allocation of value to the individual assets is to be made in accordance with the
procedures specified in FASB ASC 805-20.

Any part of the reorganization value not attributable to specific tangible assets or identifiable intangible
assets should be reported as goodwill, in accordance with FASB ASC 350-20-25-2.

Liability Values

Each liability existing at the plan confirmation date and assumed by the emerging entity should be rec-
orded in conformity with the procedures specified by FASB ASC 805-20. Accordingly, liabilities should
be generally stated as the present value of amounts to be paid, determined using appropriate current in-
terest rates. Note that the focus in determining the value at which to present the liabilities is the appro-
priate interest rate. Many factors should be considered in determining the interest rate.

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