Beruflich Dokumente
Kultur Dokumente
Corporate Liquidations
and Reorganizations
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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1: TYPES OF BANKRUPTCIES
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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
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Types of Bankruptcies
Chapter 7: Liquidation
Trustee appointed to sell assets of
business
Chapter 9: Adjustment of Debt of a Municipality
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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
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2: TRUSTEE
RESPONSIBILITIES AND
ACCOUNTING
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Duties of Trustee
Trustee serves 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
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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
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Trustee Accounting
At start of case, trustee creates a new set of
books.
During the 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
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Debtor in Possession
Unless there is a reason to appoint a
trustee, the debtor corporations
management is permitted to continue to
run the company while in bankruptcy.
The Debtor in Possession has the same
responsibilities as a trustee in a
reorganization case.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Creditors Committee
The Creditors Committee is elected in a
liquidation case, and is appointed in a
reorganization case from the largest
unsecured creditors.
Makes decisions on behalf of all
creditors
Reviews ongoing transactions of the
debtor in possession and can object
Handles negotiations with any creditor
regarding settlement or continued
business.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Benefits of Chapter 11
Benefits of being the Debtor in Possession
include:
Rejecting executory contracts
Cancelling unexpired leases
Legal protection from creditor action, such
as lawsuits or repossession of property
However, day-to-day operations may become
more difficult as lenders, suppliers, customers,
and employees are aware of the bankruptcy
filing.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Reorganization Plan
A plan may be filed at the time of the bankruptcy
filing (prepackaged bankruptcy) or by the
debtor corporation within 120 days of filing.
Other interested parties may file proposed plans
after 120 days.
Identify classes of claims
Specify the expected payout of each class
Claims within a given class must be treated
alike
Define the expected requirements for
execution of the plan
Must be fair and equitable
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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3: FINANCIAL REPORTING
DURING REORGANIZATION
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4: EMERGING FROM
REORGANIZATION
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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
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
18-24
Fresh-Start Reporting
Fresh-Start Reporting recognizes that the
emerging company is a new entity.
To qualify,
1. Revaluation value immediately before the
reorganization plan is confirmed must be
less than post-petition liabilities and allowed
claims, and
2. Holders of existing voting shares receive
less than 50% of emerging entity
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Reorganization Example
Tig files for protection under Chapter 11 on
January 5, 2011. Accordingly, it
reclassifies prepetition liabilities
obtains short-term financing
acquires additional equipment
continues operations through June 30, 2012
when the plan is approved, with a
reorganization value of $2,200
First, we'll look at the statements pre and post
reorganization. Then we'll go through the
entries and adjustments that occurred.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Fair
FYE Before
Revalue
12/31/11 6/30/12 valuation 6/30/12
Cash
50
150
300
0
Accounts receivable
500
350
335
0
Inventory
300
370
350
25
Other current assets
50
50
30
0
Land
200
200
200
100
Building, net
500
450
425
(75)
Equipment, net
300
330
290
(30)
Patent
200
150
125
(125)
Reorganization value in excess of identifiable assets
2,100
2,050 2,055
(105)
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300
335
375
30
300
350
260
0
1,950
AFTER
6/30/12
300
335
375
30
300
350
260
0
250
2,200
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Changes to Assets
Fair values and revaluation amounts are shown on 6/30/12
for comparison.
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600
FYE
12/31/11
150
100
50
Before
6/30/12
75
125
55
150
90
260
AFTER
6/30/12
75
125
55
150
395
100
500
1,200
2,300
500
500
(700)
2,100
(1,050)
2,050
2,300
500
(1,000)
2,055
800
0
2,200
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Changes to Liabilities
Upon filing on 1/5/11, Tig reclassifies the
unsecured and partially secured liabilities at that
point as Pre-petition Liabilities Subject to
Compromise.
Pre-petition Liabilities Subject to Compromise
are then reclassified or settled according to the
plan.
Accounts payable on 12/31/11 does not include
any of the $600 due prior to filing.
Taxes payable are still to be paid, and eventually
recorded again inCopyright
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Changes to 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!
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$255
2,300
$2,555
(2,200)
$355
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New Agreements
$500 new stock, $500
senior 12% bonds, and
another $100 bonds due
12/31/12
To be paid cash once
confirmed
Debt Discharge
$100
$0
$185
$90
$80
$455
Equity
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Taxes payable
12% senior debt
12% senior debt - current
Subordinated debt
Common stock (new)
Gain on debt discharge
settlement of prepetition claims
2,300
150
500
100
395
700
455
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500
100
400
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Revalue Assets
Inventory
25
Land
100
105
Buildings, net
Equipment, net
75
30
Patent
revalue assets to fair value
125
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(1,000)
455
(105)
($650)
400
($250)
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250
455
400
Deficit
105
1,000
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Simplifying Assumptions
All transactions are recorded on
6/30/12.
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.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Disclosures
Adjustments to historical values
Assets
Liabilities
Debt forgiveness
Prior retained earnings or deficit eliminated
Significant factors in determining the
reorganization value
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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