Accounting for Reorganization and legal liqui

reorganaization and

1. Accounting for Legal Liquidation and
Reorganization
Prepared By Section 4 Group 3 Members
Tesfaye Tassew (GSE/9279/14)
TigistWorku (GSE/4645/14)
WondimenhMaru (GSE/8723/14)
WorkenehLashetew (GSE/3217/14)
YisehakHailemariam (GSE/7851/14)
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2. Accounting for Legal
Liquidation and
Reorganization
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3. 5.2 Reorganization
➢Reorganization, or business restructuring, is a process where
a company does an overhaul of its current strategy, setup,
and operations.
➢Typically, businesses go through reorganization when they
have financial troubles, new owners or staff, or a structural
change.
➢When a business reorganizes, it generally changes its
business structure.
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4. 5.2.1Reorganization …
➢Reorganization is a way to rescue or save a company rather than
liquidate it
➢During reorganization, the company’s creditors may become as
the new owners.
➢Most importantly, many of its employees may secure the jobs that
otherwise will lost their jobs in a liquidation
➢Reorganization gives the company hope of survival, but it is not a
guarantee of future survival
➢One expert estimates that 90 percent of big corporations that
attempt to reorganize emerge as functioning entities but fewer
than 20 percent of smaller companies survive
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5. Types of business restructuring
➢There are a number of reasons a business might go
through reorganization.
➢Three common types of reorganization include:
1.Identity or management
2.Bankruptcy
3.Mergers and acquisitions
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6. Identity or management
➢Sometimes, a business might voluntarily decide to reorganize itself. A
company may choose to reorganize to boost profits.
➢Identity or management reorganization occurs when a business
updates things like its name, mission statement, offerings, and
operations. If you go through this type of reorganization, you might also
make changes to your staff, like adding or removing employees,
promoting workers, or moving around departments.
➢Changing up your business’s strategy and operations may result in
increased performance. But, it might also leave your customers
confused. And, identity reorganization could cost you loyal customers.
Before you change your business’s identity, conduct a risk analysis to
determine if the change is worth it.
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7. Bankruptcy reorganization
➢Failing businesses may seek for bankruptcy reorganization. Businesses
that go through this type of reorganization start by filing bankruptcy.
But, the company continues operating.
➢Bankruptcy reorganization extends a business’s life through financial
restructuring. The company may also change up other strategies, like
marketing, management, or mission.
➢Through bankruptcy reorganization, businesses make smaller payments
to creditors. Through these special arrangements, the company
attempts to pay down its debts.
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8. Mergers and acquisitions
➢A merger is when two businesses come together to form a new
company.
➢An acquisition occurs when a business buys out another business.
➢Reorganization is necessary when a merger or acquisition takes place.
➢When a business merges with another company, the joined forces may
need to restructure to develop a new identity.
➢the new combined business may need to let some employees go or
make management changes.
➢If a business is acquired by another company, restructuring typically
includes staff, management, and strategy changes.
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9. Advantages of reorganization
•Advantages of business reorganization can
include:
1.Improved profits
2.Increased efficiency
3.Business life extension
4.Improved strategy
5.Better financial arrangements
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10. Disadvantages of reorganization
•Disadvantages of business reorganization can
include:
1.The chance that it may not work
2.Decreased employee morale
3.Confused customers
4.Significant time investment
5.Setbacks in cash flow
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11. 5.2.2Numerous types of Proposals
➢Start with your business strategy
➢Identify strengths and weaknesses in the current
organizational structure
➢Consider your option and design a new structure
➢Communicate the reorganization
➢Launch your company reorganize and adjust as necessary
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12. Numerous types of Proposals (Cont…)
Start with your business strategy
➢The first component of the company reorganization
strategy is finding out why upper management wants
to reorganize.
➢Understanding the new direction of the company’s
heading or defining the problem the company
➢The business strategy will arm you with the goals or
criteria you will need.
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13. Numerous types of Proposals (Cont…)
Identify strengths and weaknesses in the current organizational
structure;
➢Consider where your current organizational structure is failing and
where it’s working.
➢Taking in to consideration the people who will be affected by
both departmental and company restructuring plans.
➢It is also important to listen to key stakeholders in the
reorganization planning process and to lean heavily on human
resource.
➢Make sure to the advantage or profit of a potential restructure
against the risk
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14. Numerous types of Proposals (Cont…)
Consider your option and design a new structure
➢Gathering feedback from stakeholders and
considering all the existing job
➢Time to create new organization model that include
the vertical and horizontal lines of authority
➢Making formal decision within department
,attributes of employees throughout the organization
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15. Numerous types of Proposals (Cont…)
Communicate the reorganization
➢Reorganization planning and determining your best path
forward
➢Time to show the rest of the company with a
reorganization announcement
➢Communicate and transparency the highest priority
through your company
➢An organization chart can help create clarity in this
situation.
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16. Numerous types of Proposals (Cont…)
Launch your company reorganize and adjust as necessary
➢The movement has finally arrived to execute the
company or department reorganizing.
➢Change can be difficult give employee some time
to adjust to the reorganizing to accurately gauge its
effects.
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17. 5.2.3Reorganization Plan
➢The plan is the heart of reorganization
➢The provisions of the plan specify the treatment of all
creditors and equity holders upon its approval by the
Bankruptcy Court.
➢Plan development to rescue the company from
insolvency is the most interesting aspect.
➢A reorganization plan may contain an unlimited
number of provisions: such as,
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18. Reorganization Plan Continued…
i.proposed changes in the company
ii.additional financing arrangements
iii.alterations in the debt structure and the like
…. The intent of all such plan is to provide long
term solution to company’s financial difficulties.
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19. Reorganization Plan Continued…
➢To be accepted by all parties involved, a plan
must bring concrete evidence that it will
enable the business emerge from bankruptcy
as a going concern.
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20. Reorganization Plan Continued…
❖Even though there is no a definitive list of element
that could be included in a reorganization proposal is
not possible, some of the common are as follows:
➢Plans proposing changes in the company’s
operations
➢Plans for generating additional monetary
resources.
➢Plans for changes in company management.
➢Plans to settle the debts of the company that
existed when the order for relief was entered
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21. Acceptance and Confirmation of
Reorganization Plan
➢The creation of a plan for reorganization does not
guarantee its implementation
➢To be accepted, each class of creditors must vote for the
plan
➢For approval, at least two-thirds (measured by the number
of shares held) of the owners who vote must agree to the
proposed reorganization
➢Although the plan may gain creditor and stockholder
approval, court confirmation is still required. The court
reviews the proposal and can reject the reorganization plan
if a claimant who did not vote for acceptance) would
receive more through liquidation
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22. Acceptance and Confirmation of
Reorganization Plan Continued
➢The court also has the authority to confirm a
reorganization plan that was not accepted by a
particular class of creditors or stockholders
➢There is also another provision referred to as cram
down in which court determines that the plan is fair
and equitable.
➢The court may convert reorganization in to
liquidation since plan development doesn’t appear
possible.
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23. 5.2.4Financial Reporting During
Reorganization
Reorganization raises specific accounting
questions:
➢Differentiating income from operations and
transactions connected to the reorganization
➢Reporting debt
➢Reporting basis of assets due to reorganization
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24. Financial Reporting During Reorganization
➢Revenues,expensesresultingfromthereorganization
ofthebusinessshallbereportedseparatelyas
reorganizationitems
➢Reorganizationitemsaresegregatedfromitems
relatedtonormalbusinessoperations
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25. Financial Reporting During Reorganization
➢Entitiesoperatinginbankruptcyshouldseparately
accountfor,presentanddisclosereorganization
items.
➢Thedeterminationofwhetheranitemis
reorganizationrelatedisjudgmental.
➢Generally,onlycoststhatareincrementaland
directlyrelatedtotheentity’sbankruptcyshouldbe
presentedasreorganizationitems.
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26. Financial Reporting During Reorganization
Reorganizationitemsmayinclude:
➢Interestincomethatwouldnothavebeenearned
withoutthebankruptcy
➢Expensesrelatedtothereorganization(Professional
feesandsimilarexpendituresdirectlyrelated
➢Gainsorlossesandcertainotheradjustments,
resultingfromadjustingdebt
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27. Financial Reporting During Reorganization
Reorganization items do not include:
➢Recurring internal costs of normal operations (salary,
rent, communications, etc)
➢Tax effects from reorganization items
➢Interest income related to normal invested capital
➢Interest expense
➢Goodwill and indefinite-lived intangible asset
impairment
➢Restructuring charges including, one-time termination
benefits
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28. Financial Reporting During Reorganization
➢Reporting entity will continue to present a balance sheet,
statement of operations, cash flows, and change in equity
after filling the petition
➢Each statements should be clearly labeled a debtor-in-
possession
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29. FASB’s Accounting Standards Codification Topic 852,
Reorganizations, requires financial statements be
prepared
I.During the reorganization and
II.When entity emerges from
reorganization
Financial Reporting During Reorganization
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30. Financial Reporting During Reorganization
Income Statement during Reorganization
➢Gains, losses, revenues and expenses of the reorganization
are reported separately from normal operations on the
income statement.
➢Any gains or losses on sale or disposal of asset by the
reorganization.
➢Professional fees (paid for lawyers, accountants, bankers……
➢Interest revenue that would not have been earned except
for bankruptcy is reported separately as a reorganization
item.
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31. Financial Reporting During Reorganization
Thefollowingisanexampleofreorganizationitemsofanentityin
bankruptcy
➢AssumeClickcorporationfilevoluntarybankruptcypetitionandis
grantedanorderofreliefinJan120x7.
➢Themanagement disposeanassetthatcoststhem10,000andhire
professionalsatthecosts8,000
➢InterestrevenueEarnedonAccumulated Cashresultingfrom
reorganizationis4,000
➢Attheendof20x7,thebankruptcyisstillinprogress
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32. Revenue:
Sales 120,000$
Cost and Expenses:
Cost of Goods Sold 110,000$
General & administrative expenses 20,000
Selling, Operating & Administrative 11,000
Interest expense 3,000 144,000
Loss before Reorganization Items & Income tax benefit (24,000)
Reorganization Items:
Loss on Disposal of Assets (10,000)
Professional Fees (8,000)
Interest revenue 4,000
Total Reorganization Items (14,000)
Loss before Income Tax Benefit (38,000)
Income Tax Benefit 14,000
CLICK CORPORATION
(Debtor-in-Possession)
Income Statement
For the Year Ended December 31, 20X7 Prepared by Section 4 Group 3 Members 32

33. Financial Reporting During Reorganization
Balance Sheet during Reorganization
➢Assets are still reported at book value.
➢Current versus noncurrent classification not applicable
for liabilities subject to reduction by the court’s
acceptance of the plan.
➢These liabilities should be reported separately at the amount of the claims.
➢Liabilities not subject to reduction are all shown as
current versus non-current.
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34. Assets
Cash 40,000
Accounts Receivable 5,000
Inventory 25,000
Total Current Assets 70,000
Property, Plant & Equipment 100,000
Less: Accumulated Depreciation (33,000) 67,000
Total Assets 137,000
Liabilities
Liabilities Not Subject to Compromise: Current Liabilities (postpetition):
Short-Term Borrowings 15,000
Accounts Payable—Trade 10,000
Total Liabilities Not Subject to Compromise
25,000
Liabilities Subject to Compromise (prepetition):
Accounts Payable 26,000
Notes Payable, Partially Secured 10,000
Notes Payable, Unsecured 80,000
Accrued Interest 3,000
Total Liabilities Subject to Compromise
119,000
Total Liabilities
144,000
Shareholders’ Equity
Preferred Stock 40,000
Common Stock ($1 par) 20,000
Retained Earnings (deficit) (67,000)
Total Shareholders’ Equity
(7,000)
CLICK CORPORATION
(Debtor-in-Possession)
Balance Sheet
December 31, 20X7 Prepared by Section 4 Group 3 Members 34

35. Financial Reporting for Companies Emerging from
Reorganization
Fresh Start Accounting
Company that successfully exits bankruptcy as a reorganized entity can
start Fresh Start accounting /Reporting/
When a company emerges from reorganization, GAAP permits fresh start
reporting if two conditions are met:
1.The reorganization value of the assets are less than the post petition
liabilities and allowed claims
2.Control change (the prepetition shareholders lose control of emerging
entity by receiving less than 50% of the voting shares.
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36. Financial Reporting for Companies Emerging from
Reorganization
Fresh Start Accounting
➢If either condition is not met, the entity does not qualify for fresh-start
accounting
➢An entity that does not qualify for fresh-start accounting would
continue to apply US GAAP, and
➢the carrying amounts of its assets would not be adjusted to the
reorganization value.
➢Liabilities compromised (that is, liabilities for which the original
payment amount or terms were modified) by a confirmed plan
would be stated at the present value of the amounts to be paid.
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37. Financial Reporting for Companies Emerging from
Reorganization
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38. Financial Reporting for Companies Emerging from
Reorganization
Fresh Start Accounting
➢Assets are restated to individual current value
➢goodwill can be recognized
➢Liabilities (except deferred income taxes) are stated at the
present value of future cash payments.
➢APIC is adjusted to balance
➢Retained Earnings is set to zero
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40. Two criteria's should be met to start fresh accounting
In our Example these two criteria's are met
1.Reorganization value of company (780,000) is less than
the sum of all liabilities incurred since beginning of
reorganization PLUSliabilities remaining from date of
order of relief before any write-down 800,000)
2.Original owners of the company are left with less than
50% of the voting stock (30,000 x 60% = 18,000 stocks are
returnedand only 12,000 40% of the original stock value
left
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49. Preventive restructuring,
reorganization and bankruptcy law
and bankruptcy law,
Commercial Code of Ethiopia
(CCE), Art 588 to Art.825
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50. Preventive restructuring, reorganization and
bankruptcy law, Commercial Code of Ethiopia (Cont...
➢Companies are governed by Commercial code of the 2021 and other
specific legislation.
➢applicable for banks and other financial institutions (Article 589-2)
➢Banking businesses are governed by the Banking Business Proclamation
of the Federal Democratic Republic of Ethiopia, FDRE, 592/2008
➢Insurance Business Proclamation of the Federal Democratic Republic of
Ethiopia, FDRE, 746/2012
➢Microfinance institutions are governed by the microfinance business
proclamation no. 626/2009 and its amendment proclamation no.
1164/2019.
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51. Preventive restructuring, reorganization and
bankruptcy law, Commercial Code of Ethiopia (Cont...
➢Preventive restructuring, reorganization and bankruptcy law
applies to traders and business organizations, craftsmen and
natural persons exercising independent professional
activities (Article 589-1).
➢Only commercial business organizations, except joint
ventures can be granted a scheme of arrangement (Article
589(1) of the CCE, 2021).
➢Article 589(1) of the Code clearly excludes non-commercial
business organizations from application of bankruptcy law
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52. Who can initiate the bankruptcy
proceeding?
➢The Debtor
➢One or more Creditors
➢The public prosecutor
➢The court it self
(Article 705 of the CCE, 2021)
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53. Actors in Bankruptcy
Court, Supervisory Judge, Trustees,
Creditors committee
➢Are responsible to accomplish the dominant role in the
bankruptcy proceeding
➢They have their own responsibilities on the administration of
bankruptcy proceeding
➢In addition, persons such as the judge, the public prosecutor, the
bankrupt debtor and the receiver, competent authorities and
individual creditors play their own role in the bankruptcy
proceedings according to the code.
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54. Actors in Bankruptcy (Cont…
The court
➢Is the is a judicial body which declares the debtor bankrupt.
➢Found on the place where the head office of the business organization
situates has jurisdiction in bankruptcy proceedings (Article 600 (1) )
➢Plays its roles like control and supervision (Article 604)
➢Appoint trustee (Article 718)
➢The court may replace the Supervisory Judge at any time by its own motion
(Article 608).
➢It renders the last decision in overall issues in connection with the bankruptcy
proceeding
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55. Actors in Bankruptcy (Cont…
Supervisory Judge
Appointed by the court in the judgment rendered for opening
reorganization and bankruptcy proceedings. (Article 605)
➢Supervise and deal with all matters concerning the bankrupt
estate;
➢Refer claims to the court and authorize the trustee to enter
appearance in legal proceedings
➢Authorize the trustee to appoint assistant
➢Call creditors committee as required by law or where he
considers to be necessary. (Article 717)
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56. Actors in Bankruptcy (Cont…
Trustees
➢Persons responsible for administering day-to-day activities
of bankruptcy proceeding
➢Trustee person must not be convicted of trust, fraud or
sentenced to deprive his civil rights
➢Trustee should be free from conflict of interest
➢Must accomplish his/her duties such as depositing funds of
the debtor, represent the universalities of creditors,
administer the bankrupt estate in due care and in person
(Article 720 )
➢Entitled to some remuneration (Article 616 ).
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57. Actors in Bankruptcy (Cont…
Creditor Committee
➢The main role is facilitating creditor’s participation in bankruptcy
proceedings
➢The number of committee members selected by the supervisory
judge must be five (Article 722 (1) ).
➢They are not entitled to payment of remuneration but can
reimburse expenses approved by the trustee (Article 723 (8) ).
➢Their role may be into advisory (Article 723 (1) )
➢Supervise the trustee (Article 723 (4) )
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58. References
➢Joe Ben Hoyle, Schaefer, T.F. and Doupnik, T.S. (2011).Advanced
accounting. New York: Mcgraw-HillIrwin.
➢“3.2 Financial Reporting during Bankruptcy under ASC 852-10.” n.d.
Viewpoint.pwc.com. Accessed January 11, 2022.
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/bankruptcies_and
_liq/bankruptcies_and_liq_US/chapter_3_accounting_US/32_financial_reporti
_US.html.
➢“Financial Reporting Developments a Comprehensive Guide Bankruptcies,
Liquidations and Quasi-Reorganizations.” n.d.Accessed January 11, 2022.
https://assets.ey.com/content/dam/ey-sites/ey-
com/en_us/topics/assurance/accountinglink/ey-frd-bb1840-04-14-
2021.pdf?download.
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