Chapter Thirteen

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Chapter Thirteen
Accounting for Legal Reorganizations
and Liquidations
Bankruptcy

• insolvent unable to pay debts when due
• bankruptcy a structured process to protect all
  parties
• 9 of 12 largest bankruptcies since 2001
• voluntary or involuntary
• liquidation (Chapter 7) or reorganization
  (Chapter 11)

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Types of Liabilities

• fully secured net realizable value of collateral
  exceeds the debt
• partially secured with some collateral
• unsecured liabilities with priority
• claims for administrative expenses
• obligations arising after petition is filed and
  before order of relief is issued
• some employee wages benefits
• some customer deposits
• claims for unpaid taxes

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• interim trustee / permanent trustee
• committee of unsecured creditors
• general reporting rules

Statement of Realization and Liquidation

• account balances at filing date of order of
  relief
• shown horizontally by major category
• cash receipts and disbursements
• adjustments and write-offs

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Prob 13-46
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• to salvage the company
• control normally retained by the ownership
• a plan for reorganization
• approved by creditors and stockholders

Financial Statements During Reorganization

• gains, losses, income, expenses from
  reorganization reported separately
• historical cost but not current/non-current
• distinguish liabilities that are not subject to
  compromise from those that are

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Financial Reporting for Companies Emerging from
Reorganization

• fresh start accounting if
• assets are less than claims
• original owners have less than 50 of voting
  stock
• reorganization value approximates fair value
• goodwill can be recognized
• liabilities reported at present value of future
  cash payments