Page 127 - Bankruptcy Volume 1

Deferred Taxes

Deferred taxes are to be reported in conformity with GAAP as provided in FASB ASC 852-740-45-1.
Deferred taxes must be reported if there is a difference between the fair value of assets and liabilities and
the tax basis of those assets and liabilities. For example, if the fair value of an asset as a result of the al-
location described previously is $80 and the tax basis is only $30, deferred taxes must be recorded for
the difference between these two values. Because deferred tax is not an asset or liability that would have
been recognized as a result of the allocation of reorganization value, the net deferred tax asset or liability
must be added to the balance sheet. In recognizing this deferred tax amount, an adjustment is also re-
quired, which would typically add to or deduct from goodwill.

In many reorganizations, a deferred tax liability will not be recorded due to the existence of net operat-
ing loss (NOL) carryovers. If not recognizable at the fresh-start reporting date, initial recognition (that
is, by elimination of the valuation allowance) of tax benefits realized from preconfirmation NOL car-
ryovers and deductible temporary differences are reported as reductions to income tax expense of the re-
organized entity.

Equity Accounts

Adopting fresh-start reporting results in a new reporting entity with no beginning retained earnings (def-
icit) or accumulated other comprehensive income or loss.

Pushdown Accounting

A public entity that reports its assets and liabilities at fair value under fresh-start reporting should adjust
the assets and liabilities of its subsidiaries to fair value, regardless of whether the subsidiary itself was a
debtor entity, to accurately report its investments in the subsidiaries at fair value. The fresh-start adjust-
ments may be made in consolidation or at the entity level. These adjustments should be reflected in any
separately issued subsidiary financial statements prepared in accordance with U.S. GAAP. fn 4 Privately
held entities should review FASB ASU No. 2014-17, Business Combinations (Topic 805): Pushdown
Accounting (a consensus of the FASB Emerging Issues Task Force), for guidance in the application of
pushdown accounting.

Disclosure Requirements

When fresh-start reporting is adopted, the notes to the initial financial statements of the reorganized enti-
ty should disclose the following:

 Adjustments to the historical amounts of individual assets and liabilities

 The amount of debt forgiveness

fn 4 SEC Staff Accounting Bulletin Topic 5-J, Push Down Basis of Accounting Required in Certain Limited Circumstances, provides
for SEC registrants to apply push-down accounting in the separate financial statements of their subsidiaries (except in situations de-
scribed in question 2 of SAB Topic 5-J) because a new entity is created by the change in control, resulting in fresh-start reporting upon
emergence from bankruptcy.

© 2020 Association of International Certified Professional Accountants 125