chapter 19 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
CHAPTER 19 PowerPoint Presentation
Download Presentation
CHAPTER 19

Loading in 2 Seconds...

play fullscreen
1 / 32

CHAPTER 19 - PowerPoint PPT Presentation


  • 358 Views
  • Uploaded on

CHAPTER 19. BANKRUPTCY REORGANIZATIONS AND LIQUIDATIONS. FOCUS OF CHAPTER 19. Bankruptcy Statutes Bankruptcy Reorganizations Liquidations Accounting by Trustees. Bankruptcy Statutes: Their Significance.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'CHAPTER 19' - Rita


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 19

CHAPTER 19

BANKRUPTCY REORGANIZATIONS

AND LIQUIDATIONS

focus of chapter 19
FOCUS OF CHAPTER 19
  • Bankruptcy Statutes
  • Bankruptcy Reorganizations
  • Liquidations
  • Accounting by Trustees
bankruptcy statutes their significance
Bankruptcy Statutes: Their Significance
  • Under the bankruptcy statutes, a company is placed under the protection of the bankruptcy court.This means that:
    • Creditors are prevented from taking legal action individually otherwise available to them.
    • Creditors’ legal rights are thus suspended for an indefinite period.
bankruptcy statutes their significance1
Bankruptcy Statutes: Their Significance
  • When a corporation is in bankruptcy proceedings, the bankruptcy judge controls the company.
  • A subsidiary in bankruptcy proceedings cannot be consolidated by its parentbecause the parent has lost control.
bankruptcy statutes applicability
Bankruptcy Statutes: Applicability
  • Thebankruptcy statutes apply to:
    • Individuals.
    • Partnerships.
    • Corporations.
    • Municipalities.
bankruptcy statutes applicability1
Bankruptcy Statutes: Applicability
  • Thebankruptcy statutes do not apply to:
    • Insurance companies.
    • Certain financial institutions, such as banks and savings and loans, which are subject to alternative regulations.
bankruptcy statutes types of petitions
Bankruptcy Statutes: Types of Petitions
  • A company can file for bankruptcy protectionby filing a voluntary petition.
  • A company’s creditors can file an involuntary petition if the debtor:
    • Is generally NOT paying its debts as they become due or
    • Has appointed a custodian orgiven possession of its property to a custodian.
bankruptcy statutes creditors with priority
Bankruptcy Statutes: Creditors With Priority
  • A special class of creditors created by the bankruptcy statutes is called “creditors with priority.”
  • These creditors are given statutory priority over the claims of other unsecured creditorswith regard to payment.
bankruptcy statutes creditors with priority1
Bankruptcy Statutes: Creditors With Priority
  • Creditors Claims With Priority:
    • Administrative expenses related to the bankruptcy proceeding (postpetition claims).
    • Wages, salaries, and commissions earned within 90 days before the bankruptcy filing (up to $4,000 per employee).
    • Employee benefit plan claims (specified).
    • Depositsby individuals.
    • Taxes.
bankruptcy statutes chapter 7 vs chapter 11
Bankruptcy Statutes: Chapter 7 Vs. Chapter 11
  • Chapter 7 of the Bankruptcy Statutes:
    • Deals with liquidations:
      • Sell the assets, pay the creditors, close down the business.
  • Chapter 11 of the Bankruptcy Statutes:
    • Deals with reorganizations:
      • Certain debts are forgiven & the company is able to get a “fresh start.”
bankruptcy statutes chapter 11 vs troubled debt restructuring
Bankruptcy Statutes: Chapter 11 Vs. Troubled Debt Restructuring
  • Filing for bankruptcy reorganizationis a last resort short of liquidation.
  • Most companies prefer to attempt a troubled debt restructuring outside of the bankruptcy court. Advantages are:
    • Can be done in far less time.
    • Avoids the stigma of having gone through bankruptcy proceedings.
chapter 11 bankruptcy reorganizations management s role
Chapter 11 BankruptcyReorganizations: Management’s Role
  • In a Chapter 11 bankruptcy filing, the debtor’s management usually:
    • Continues to manage and operate the company.
    • Develops a plan of reorganization,to be submitted to creditors and the bankruptcy court.
chapter 11 bankruptcy reorganizations debt forgiveness
Chapter 11 BankruptcyReorganizations:Debt Forgiveness
  • If the creditors approve of any plan of reorganization, certain debt is forgiven.
    • Formally, this is referred to as a“discharge of indebtedness.”
  • Certain debt cannot be discharged under the bankruptcy statutes, such as:
    • Taxes
    • Debt incurred under false pretenses.
chapter 11 bankruptcy reorganizations accounting issues
Chapter 11 BankruptcyReorganizations:Accounting Issues
  • The Accounting Issues:
    • How to calculate whether any debt has been forgiven.
      • This issue includes whether interest should be imputed.
    • How to report a forgiveness of debt.
chapter 11 bankruptcy reorganizations accounting issues1
Chapter 11 BankruptcyReorganizations: Accounting Issues
  • These are the identical issues that exist in troubled debt restructurings, which are governed by FAS 15.
  • However, the AICPA’s SOP 90-7, which applies exclusively to bankruptcy reorganizations applies—NOT FAS 15.
chapter 11 bankruptcy reorganizations sop 90 7
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • The central idea of SOP 90-7 is that the entity that emerges from Chapter 11 be deemed a new entity for which fresh-start financial statements should be prepared.
  • No beginning retained earnings or deficit (deficits usually exist) is reported.
  • A small percentage of entities emerging from Chapter 11 will not qualify for fresh-start accounting under SOP 90-7.
chapter 11 bankruptcy reorganizations sop 90 71
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • Under SOP 90-7, comparative financial statements that straddle a confirmation date cannot be presented because it would be an inappropriate comparison of:
    • A former entityand
    • A new entity.
chapter 11 bankruptcy reorganizations sop 90 72
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • Under SOP 90-7, any forgiveness of debt (“discharge of indebtedness”) is:
    • Calculated by determining the present value of amounts to be paid using appropriate current interest rates.
    • Reported as an extraordinary item in the predecessor entity’s final statement of operations.
chapter 11 bankruptcy reorganizations sop 90 73
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • Under SOP 90-7, all assets are restated to reflect their fair value at the date of reorganization. Three steps are required:
    • Determining the “reorganization value” of the entity—an amount that approximates what a “willing buyer” would pay for the assets of the emerging entity immediately afterthe restructuring.

#1

chapter 11 bankruptcy reorganizations sop 90 74
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • Allocating the reorganization value to the entity’s tangible and intangible assets.
  • Reporting any unallocated value as goodwill (subsequently to be evaluated periodically for impairment).

#2

#3

chapter 11 bankruptcy reorganizations sop 90 75
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • Under SOP 90-7, the “old entity” prior tothe confirmation date is to report:
    • Bankruptcy related losses and expenses in a separate “REORGANIZATIONS ITEMS” category in its statement of operations.
chapter 11 bankruptcy reorganizations sop 90 76
Chapter 11 BankruptcyReorganizations: SOP 90-7
  • Also under SOP 90-7, the “old entity” prior to the confirmation date is to report IN ANY BALANCE SHEETS ISSUED, its liabilitiesin the following specified categories:
    • PRE PETITION liabilities subject to compromise,
    • PRE PETITION liabilities notsubject to compromise (priority), and
    • POST PETITION liabilities (priority).
chapter 7 bankruptcy liquidations
Chapter 7 Bankruptcy Liquidations
  • In a Chapter 7 filing (for liquidation). the court usually appoints a trustee to liquidate the company.
  • Trustees have the power tovoidfraudulent and preferential transfers made by the debtor within certain specified periods preceding the filing date.
chapter 7 bankruptcy liquidations1
Chapter 7 Bankruptcy Liquidations
  • In a Chapter 7 filing, a special statement (called the “statement of affairs”)is prepared on a “quitting concern” basis.
  • This statement provides information concerning how much money each class of creditors canexpect to receive on liquidation of the company.
    • This is a pro forma (“as if ”) statement.
accounting by trustees
Accounting By Trustees
  • If the court or creditors desire information that discloses the trustee’s responsibility for the book balances existing when the trustee was appointed, a statement of realization and liquidation can be prepared.
    • This is a historical statement in its entirety (nothing pro forma about it).
review question 1
Review Question #1

Which accounts are adjusted to a zero balance in a bankruptcy reorganization that qualifies for fresh start accounting?A. Accumulated depreciation. B. Additional Paid-in Capital. C. Retained Earnings. D. Accumulated Deficit. E. None of the above.

review question 1 with answer
Review Question #1With Answer

Which accounts are adjusted to a zero balance in a bankruptcy reorganization that qualifies for fresh start accounting?A. Accumulated depreciation. B. Additional Paid-in Capital. C. Retained Earnings.D. Accumulated Deficit.E. None of the above.

review question 2
Review Question #2

Which classifications are NOT used in a debtor’s balance sheet issued prior to adopting fresh start accounting in a bankruptcy reorganization?A. Prepetition liabilities—subject to compromise.B. Prepetition liabilities—not subject to compromise.C. Postpetition liabilities—subject to compromise.D. Postpetition liabilities—not subject to compromise.

review question 2 with answer
Review Question #2With Answer

Which classifications are NOT used in a debtor’s balance sheet issued prior to adopting fresh start accounting in a bankruptcy reorganization?A. Prepetition liabilities—subject to compromise.B. Prepetition liabilities—not subject to compromise.C. Postpetition liabilities—subject to compromise.D. Postpetition liabilities—not subject to compromise.

review question 3
Review Question #3

How is a discharge of indebtedness in a bankruptcy reorganization that qualifies for fresh start accounting reported?

A. Extraordinary item in old entity’s statements.

B. Extraordinary item in new entity’s statements.

C. A credit to Additional Paid-in Capital.

D. A credit directly to Retained Earnings.

E. An item in Other Comprehensive Income.

review question 3 with answer
Review Question #3With Answer

How is a discharge of indebtedness in a bankruptcy reorganization that qualifies for fresh start accounting reported?

A. Extraordinary item in old entity’s statements.

B. Extraordinary item in new entity’s statements.

C. A credit to Additional Paid-in Capital.

D. A credit directly to Retained Earnings.

E. An item in Other Comprehensive Income.

end of chapter 19
End of Chapter 19

Time to Clear Things Up—Any Questions?