Kế toán, kiểm toán - Chapter thirteen: Accounting for legal reorganizations and liquidations

Chapter Thirteen Accounting for Legal Reorganizations and Liquidations Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinBankruptcyA basic assumption of accounting is that a business is a going concern (will remain in business).Occasionally, a business becomes insolvent (unable to pay debts as they come due).An insolvent business can either cease to exist, or can seek a legal remedy called bankruptcy. LO 113-*Company files a petition with courts requesting bankruptcy.When facing prospect of severe losses or a difficult operating environment, companies will seek voluntary Chapter 11.Bankruptcy Reform Act of 1978LO 2Creditors file petition with the court. Can force company into liquidation under Chapter 7 or receiving protection under Chapter 11.Involuntary BankruptcyVoluntary Bankruptcy13-*Criteria for Forcing Involuntary BankruptcyWhen there are 12 or more unsecured creditors:At least 3 must sign the petitionThose that sign must have total unsecured debts of at least $14,425If there are fewer than 12:Only 1 must signThe minimum debt limit remains $14,425(Debt limit balances are adjusted every three years based on the Consumer Price Index)13-*Court Response to the PetitionNeither a voluntary nor involuntary petition automatically creates a bankruptcy.Bankruptcy Court may reject voluntary petitions if the action is considered detrimental to the creditors.Bankruptcy Court may reject involuntary petitions unless evidence indicates the debtor’s inability to meet obligations as they come due (slowness of payment is NOT sufficient cause!!)13-*Court Response to the PetitionIf the court accepts the petition, it grants an order for relief.The order for relief halts all actions against the debtor. The automatic stay prohibits creditors from collecting debts without the court’s permission A trustee is appointed to oversee the bankruptcy process.13-*Fully SecuredPartially SecuredUnsecured With PriorityUnsecuredTop PriorityClassification of CreditorsEach level must be paid in full prior to making distributions to the next level.LO 313-*Reorganization or Liquidation?How will the debtor be discharged from its obligations?Under Chapter 7, the debtor’s assets will be liquidated and the proceeds distributed to creditors (based on their priority status) ORUnder Chapter 11, the debtor will be permitted to reorganize and continue operations.(These “chapters” refer to the relevant sections of the Bankruptcy Reform Act)LO 413-*Assets labeled as:Pledged with fully secured creditors.Pledged with partially secured creditors.Available for priority liabilities and unsecured creditors.Debts labeled as:Liabilities with priority.Fully secured creditors.Partially secured creditors.Unsecured creditors.Statement of Financial AffairsStatement helps creditors decide between reorganization and liquidation for debtor.LO 513-*Liquidation – Chapter 7 BankruptcyLO 6Interim Trustee is appointed by court. Changes locks, and secures assets and records.Posts notices that assets are in possession of US trustee. Compiles all financial records.Obtains possession of all corporate records.An advisory committee of 3 - 11 unsecured creditors is appointed.13-*A legal way to “salvage” a company rather than liquidate it.Reorganization -Chapter 11 BankruptcyThe company is temporarily protected from its creditors.Creditors are encouraged to negotiate new terms with the company.LO 713-*Financial Reporting During ReorganizationFASB’s Accounting Standards Codification Topic 852, Reorganizations, requires financial statements be preparedDuring the reorganization andWhen entity emerges from reorganization.Gains, losses, revenues and expenses of the reorganization are reported separately.Liabilities are restated.Current versus noncurrent classification not applicable.LO 813-*Fresh Start ReportingWhen a company emerges from Chapter 11, GAAP permits fresh start reporting if two conditions are met:The reorganization (or market) value of the assets are greater than the total of the allowed claims as of the date of the order for relief plus any subsequent liabilities.The original owners are left with less than 50% of the voting stock.LO 913-*Fresh Start AccountingFresh Start AccountingAssets are restated to current market value.Liabilities are stated at the discounted present value of future cash payments.Retained Earnings is set to zero.Normally, APIC is adjusted to balance.13-*