Page 129 - Bankruptcy Volume 1

Preconfirmation contingencies could include uncertainties concerning the following:

 Amounts ultimately to be realized upon the disposition of assets designated for sale by the con-
firmed plan; proceeds upon disposition may vary from values estimated at confirmation

 Nondischargeable claims (for example, environmental issues)

 Disputed, unliquidated, or contingent claims when the amount of the allowed claim differs from
the estimates determined for financial reporting purposes and that difference results in the reor-
ganized company issuing additional or less consideration based on the difference between the es-
timated and allowed amounts

If the recovery to the relevant creditor pursuant to the plan is a prorated portion of a previously deter-
mined fixed amount (that is, a "pot plan" in which the creditors share in a fixed pool of value), then any
adjustment to an individual creditor’s disputed, unliquidated, or contingent claim will not affect the fi-
nancial statements of the reorganized entity in periods subsequent to the initial recording of the effects
of the plan or reorganization. As an example, say allowed claims are estimated at $10 and, under the
plan, creditors will receive a pro-rated portion of 100 shares of the reorganized company. Should the al-
lowed claims end up at $20, while recovery by the creditors declines from 10 shares per dollar of al-
lowed claim to 5 shares, there is no impact on the company, because under the plan the company was
obligated to put forth the "pot" of 100 shares for distribution to allowed claimants.

In situations in which an adjustment to an individual creditor’s claim will change the payout required of
the company (for example, a plan with no cap on the payout, such as 10 shares per $1 of allowed claim),
the adjustment amount in periods subsequent to the initial recording of the effects of the plan would be
based on the expected payout (in this example, an additional $10 in allowed claims would result in the
issuance of an additional 100 shares over the original estimate of what the allowed amount would be)
with an offsetting loss on the extinguishment of debt in the income or loss from continuing operations of
the reorganized entity.

Preconfirmation contingencies do not include the following:

 Allocation of reorganization value to the entity’s assets and liabilities. The initial allocation of
the value of the reorganized entity to individual assets and liabilities in conformity with the re-
quirements of FASB ASC 805 may require the use of estimates. Those estimates may change
when information the entity has arranged to obtain has been received — for example, once ap-
praisals of certain assets of the reconstituted business have been received.

 Deductible temporary differences or net operating loss and tax-credit carryforwards that exist at
confirmation.

Example of Implementing Fresh-Start Reporting

The following steps demonstrate the requirements for a debtor’s emergence from Chapter 11 to qualify
for the application of fresh-start accounting.

1. Record the cancellation of any debt.

2. Record the cancellation of any equity.

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