Page 76 - Bankruptcy Volume 1

Interest earned on accumulated cash resulting 1
from Chapter 11 proceedings
(119)
Loss before income tax benefit and discontin- $ (72)
ued operations

Note that the reader of the statement of operations can determine the amount of income generated from
continuing operations. The impact of the reorganization is reported separately. Although it may involve
management’s judgment to determine the earnings that relate to ongoing operations, a reasonable esti-
mate is much more beneficial to the reader than commingling both operating and reorganization results.

Restructuring Gains or Losses

Gains or losses from the restructuring or disposal of assets directly related to reorganization are reported
as a reorganization item unless the disposal meets the requirement for discontinued operations or ex-
traordinary item treatment in conformity with FASB ASC 205-20 or 225-20.

The debtor should report gains or losses associated with the cancellation on any lease or executory con-
tract as a reorganization item. The debtor’s statement of operations would also report the gain or loss
from the entries made to adjust the carrying value of debt such as in the example in the "Reporting
Claim Value" section so that the recorded liability agrees with the amount of the allowed claim.

Professional Fees

Professional fees are expensed as incurred and reported separately as a reorganization item. Professional
services that have been rendered but not paid are accrued to the extent that the debtor expects the court
to allow these fees as administrative expenses. In many cases, the court will hold back from allowance
and payment some amount of the professional fees requested until the conclusion of the Chapter 11 case.
In such cases, the debtor should base the amount of the accrual on what is ultimately expected to be al-
lowed, even if the court’s allowance is not expected for some time.

Interest Income

The debtor reports any interest income earned in a Chapter 11 case that would not have been earned but
for the proceeding. In many cases, the debtor accumulates large amounts of cash because the debtor is
not servicing any prepetition debt while operating in a Chapter 11 reorganization. Thus, interest income
is not a normal operating item and is presented as a reorganization item.

To determine the amount of interest income to report as a reorganization item, the debtor determines the
excess interest earned above an estimate of the interest income that would have been earned if a Chapter
11 petition had not been filed. This amount is reported as a reorganization item. In many cases, because
a cash shortage often leads to the debtor filing a bankruptcy petition, very little interest income could
have been earned without filing the petition.

For example, Company A has a revolving loan agreement with Bank B. Each day prior to Company A’s
bankruptcy filing, Bank B swept Company A’s cash accounts to pay down its loan. Company A generat-
ed no interest income from its operating cash prior to the bankruptcy filing. Company A also maintained
escrows with its customers from which it recognized interest income under the escrow agreements. Up-
on filing for Chapter 11, Company A could not reach an agreement to obtain DIP (debtor-in-possession)
financing from Bank B so Company A petitioned the court and was granted the use of cash collateral.
Even after making adequate protection payments to Bank B, Company A accumulated cash which it in-

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