Page 71 - Bankruptcy Volume 1

Chapter 9

Financial Reporting During the Reorganization

Accountants may perform many services during a Chapter 11 case that involve financial statements.
FASB ASC 852, Reorganizations, addresses those provisions companies reorganizing under Chapter 11
must follow and disclose any departures therefrom. Financial statements issued during the reorganiza-
tion or on emergence from Chapter 11, including statements issued based on audit or review, must fol-
low FASB ASC 852 in order for the financial statement to be presented in accordance with GAAP.

FASB ASC 852 applies to financial reporting by companies that have filed Chapter 11 petitions and ex-
pect to reorganize and continue operations, and companies that emerge from Chapter 11 under con-
firmed plans. It does not apply to companies that are restructuring their debt outside of Chapter 11, or to
those that adopt Chapter 11 plans of liquidation. However, no specific guidance exists for entities who
have filed a Chapter 11 petition intending to liquidate under a plan of reorganization. For those entities,
common practice has been for the debtor to follow the financial reporting during reorganization guid-
ance discussed herein until such time as the formal plan of liquidation has been approved. Once the for-
mal plan of liquidation has been approved, the “Liquidation Basis of Accounting” subtopic in FASB
ASC 205, Presentation of Financial Statements, should be followed by the reporting entity. FASB ASC
852 is not applicable to Chapter 7 cases or governmental reorganizations under Chapter 9.

This section addresses how to account for the entity during the Chapter 11 proceedings, the information
required for operating reports, special report preparation, and financial analysis needed while the debtor
attempts to reorganize in accordance with FASB ASC 852. A subsequent section describes the reor-
ganized debtor’s accounting on emerging from Chapter 11. The reader should also refer directly to
FASB ASC 852.

The reorganizing debtor’s financial statements should demonstrate the financial evolution of the debtor
during the Chapter 11 proceeding. For financial statements issued in the year the petition is filed and in
subsequent years, the debtor should distinguish transactions and events directly associated with the reor-
ganization from transactions related to the ongoing operation of the business. Several significant areas of
the financial statements reflect this principle.

Balance Sheet

Paragraphs 4–8 of FASB ASC 852-10-45 provide specific guidance for preparing the liability section of
the balance sheet in a reorganization.

Liabilities

Prepetition liabilities subject to compromise (LSTC) are to be reported separately from those not subject
to compromise and from postpetition liabilities. Liabilities subject to compromise include unsecured
claims, undersecured claims, and fully secured claims that may be impaired under a plan. If there is
some uncertainty as to whether a secured claim is undersecured or will be impaired under the plan, the
entire amount should be included with prepetition claims subject to compromise (see FASB ASC 852-
10-45-4).

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