Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Corporate Liquidation and Reorganization
Pertemuan 19-20
Corporate Liquidations and Reorganizations
1: Types of Bankruptcies
Insolvency
• Equity insolvency
– Inability to pay debts on time
• May avoid bankruptcy proceedings
• Negotiate directly with creditors
• Bankruptcy insolvency
– Having total debts in excess of the fair value of assets
• May be liquidated, or
• Reorganized
Types of Bankruptcies
Chapter 7: Liquidation
• Trustee appoint to sell assets of business
Chapter 9: Adjustments of Debts of a Municipality
Chapter 11: Reorganization
• Debtor is expected to be rehabilitated
Chapter 12: Farmers
Chapter 13: Adjustment of Debts of an Individual with
Regular Income
Characteristics
• Voluntary bankruptcy proceedings
– Filed by debtor
• Involuntary bankruptcy proceedings
– Filed by creditor or group of creditors
• Court action
– Dismiss a case
– Accept the petition
– Change form
Chapter 11 reorganization
Chapter 7 liquidation
Duties of Trustee
Trustee in liquidation cases
• Investigate debtor's financial affairs
• Provide information
• Examine, perhaps object to, creditor claims
• File report on trusteeship
• If authorized to operate debtor's business, other period
reports are required
In reorganization cases, in addition to above
• Filing reorganization plan or statement why one cannot
be filed
Ranking of Claims: Liquidation
Corporate Liquidations and Reorganizations
2: Corporate Liquidation
Statement of Affairs
• Legal document prepared for bankruptcy court
– Assets at expected net realizable values
– Classified on basis of availability for classes of creditors
– Liabilities are classified
• Priority, fully secured, partially secured, unsecured
– Historical values included for reference
Trustee Accounting
• At start of case
– New set of books
• Through case
–
–
–
–
–
Records transactions
Statement of cash receipts and disbursements
Statement of changes in estate equity
Balance sheet
Statement of realization and liquidation
• At close of case
– Final settlement of claims
– Trustee is dismissed
Corporate Liquidations and Reorganizations
3: Corporate Reorganization
Chapter 11: Balance Sheet
•
Prepetition liabilities subject to compromise are reported
as a separate line item in liabilities
– Arose before filing
– Include
• Unsecured and under-secured liabilities
• Prepetition secured liabilities and post petition liabilities
reported in normal fashion
• Prepetition claims discovered after filing
– Included at court allowed amounts
Chapter 11: Other Statements
• Reorganization costs shown separately
• Interest to be paid or probable amount
– Differences from contractual amounts should be noted
• Expected stock or stock equivalent issuances should be
disclosed
• Cash flow items related to reorganization shown
separately
Combined Financial Statements
• Condensed combined financial statements are prepared
for all entities in reorganization proceedings as
supplementary information
– Intercompany receivables and payables
– Write-down if necessary
Corporate Liquidations and Reorganizations
4: Emerging from Reorganization
Reorganization Value
Approximates fair value of entity without considering
liabilities
–
–
Discounted future cash flows of reorganized business
Consider business and financial risk
Reorganization value determines how much creditors
recover
Emerging business will either use
1. Fresh start reporting
2. Report liabilities at present value and forgiveness
of debt as extraordinary item
Qualify for Fresh Start Reporting
• Just before confirmation of the plan,
– Revaluation value must be less than post petition liabilities and
allowed claims, and
– Holders of existing voting shares receive less than 50% of
emerging entity
Apply Fresh Start Reporting
• Allocated reorganization value to identifiable assets
– Unallocated amount is an intangible
• Reorganization value in excess of amounts allocated to identifiable
assets
• Liabilities at current value at confirmation date
• Deferred taxes follow FASB No. 109
• Prepare final reports of old entity
Reorganization Example
• Tiger files for protection under Chapter 11 on
1/5/08. Accordingly, it reclassifies prepetition
liabilities.
• It obtains short term financing, acquires additional
equipment and continues operations through
6/31/09 when the plan is approved.
First, we'll look at the statements pre and post
reorganization. Then we'll go through the entries and
adjustments that occurred.
Balance Sheet Assets
Filed
FYE Before
1/5/08 12/31/08 6/30/09
Fair Revalu
6/30/09
ation
Cash
50
150
300
300
Accounts
500
350
335
335
Inventory
300
370
350
375
Other current
50
50
30
30
Land
200
200
200
300
Building, net
500
450
425
350
Equipment, net
300
330
290
260
Patent
200
150
125
0
Reorganization value in excess of identifiable assets
2,100
2,050 2,055
1,950
25
100
(75)
(30)
(125)
(105)
AFTER
6/30/09
300
335
375
30
300
350
260
0
250
2,200
Changes to Assets
Fair values and revaluation amounts are shown on 6/30/09 for
comparison.
• Tiger continues operations, records depreciation and
even acquires equipment from filing on 1/5/08 to
reorganization on 6/30/09.
• The reorganization revalues the assets to their fair
value on that date. Patents are completely written off.
• Tiger records an intangible "Reorganization value in
excess of identifiable assets" of $250. Not all
reorganizations result in this intangible.
Balance Sheet – Liability & Equity
Short term borrowing (post)
Accounts payable (pre/post)
Wages payable (post)
Taxes payable (pre)
Accrued bond interest (pre)
Note payable (pre)
Subordinated debt (post)
12% bonds payable – current (post)
12% bonds payable (post)
15% bonds payable (pre)
Liabilities subject to compromise
Capital stock (old)
Capital stock (new)
Additional paid in capital
Deficit
Filed
1/5/08 FYE 12/31/08
150
600
100
50
150
90
260
1,200
Before
6/30/09
75
125
55
AFTER
6/30/09
75
125
55
150
395
100
500
500
2,300
500
2,300
500
(700)
2,100
(1,050)
2,050
(1,000)
2,055
800
0
0
2,200
What Happened to Liabilities?
• Upon filing on 1/5/08, Tiger reclassifies the unsecured
and partially secured liabilities at that point as Prepetition Liabilities subject to compromise.
• Pre-petition Liabilities subject to compromise are
reclassified or settled according to the plan.
• Accounts payable on 12/31/08 does not include any of
the $600 due prior to filing.
• Taxes payable are still to be paid, and eventually
recorded again in full.
Changes in Equity
• Some of the creditors receive stock in the reorganized
firm. The old shareholders also receive stock, but now
own only $100 of $800 of the stock at book value.
• Although some APIC was recorded in reorganizing, it
was subsequently eliminated. If it had been
sufficient to wipe out the deficit, no intangible
"reorganization value in excess of identifiable
assets" would be recorded.
• The Deficit is removed: Fresh Start!
Can Tiger Use Fresh Start?
Post-petition liabilities
Allowed claims
Total liabilities
Less reorganization value
Excess liabilities
$255
2,300
$2,555
(2,200)
$355
On 6/30/09 there were $255 in post-petition liabilities. All
$2,300 pre-petition liabilities were allowed by the
courts. Firm value is $2,200.
1. Liabilities exceed reorganization value
2. Old shareholders retain less than 50%
Yes, fresh start is appropriate.
Reorganization Plan: 6/30/09
New Agreements
Pre-petition Liabilities and
15% partially secured
Debt Dis$500 new stock, $500
bonds, and another
due 12/31/09
$100
Priority tax claims $150
To be paid cash once
Remaining unsecured claims, $950:
$600 accounts payable
$275 subordinated debt
new stock
$90 accrued interest
Forgiven
$260 note
$120 subordinated debt
new stock
Total debt discharged
Old stock
$100 new stock
$0
$185
$90
$80
$455
Equity
Record New Debt Agreements
Liabilities subject to compromise (pre)
2,300
Taxes payable
150
12% senior debt
500
12% senior debt - current
100
Subordinated debt
395
Common stock (new)
700
Gain on debt discharge
455
settlement of prepetition claims
This entry reclassifies the pre-petition debt according to
the reorganization plan.
Give Shareholders New Shares
Common stock (old)
500
Common stock (new)
100
Additional paid in capital
400
exchange of stock with owners
They will lose control since creditors have $700 of
common stock.
Revalue Assets
Inventory
Land
Loss on asset revaluation
25
100
105
Buildings, net
75
Equipment, net
30
Patent
125
revalue assets to fair value
A loss is recorded in revaluing the assets. Refer back to
the Asset side of the balance sheet.
Calculate Balance in Retained Earnings
(Deficit)
Deficit, 6/30/09
Gain on debt discharge
Loss on asset revaluation
Final measure of deficit, 6/30/09
Write-off Additional paid in capital
Reorganization value in excess of identifiable assets
(1,000)
455
(105)
($650)
400
($250)
If sufficient APIC had existed, there would be no
intangible asset, and excess APIC would remain on
the balance sheet.
Eliminate Deficit in Equity
Reorganization value in excess of
250
Gain on debt discharge
455
Additional paid in capital
400
Loss on asset revaluation
Deficit
105
1,000
The $1,000 deficit on 6/30/09 is adjusted for the gain on
debt discharge and loss on asset revaluation. The net
$650 deficit eliminates all of the APIC and creates a
$250 intangible.
Simplifying Assumptions
• All transactions are recorded on 6/30/09. Generally this
takes some time.
• Creditors may have interest between submission and
approval of plan.
• All pre-petition debt is approved.
• The $2,200 reorganization value of the firm probably
used a discounted cash flow firm valuation model.
Disclosures
• Adjustments to historical values
– Assets
– Liabilities
• Debt forgiveness
• Prior retained earnings or deficit eliminated
• Significant factors in determining the reorganization
value