Reorganizations

ASC 852 covers financial reporting by entities undergoing corporate reorganization, in two flavors. Subtopic 852-10 addresses Chapter 11 debtors expecting to reorganize as going concerns: GAAP continues to apply, but the statements must isolate reorganization effects—prepetition liabilities subject to compromise are segregated at expected allowed amounts (852-10-45-4 through 45-5), reorganization items (including professional fees expensed as incurred and interest income earned only because of the proceeding) are shown separately in the income statement and cash flow statement (852-10-45-9 through 45-13), and interest expense is reported only to the extent it will be paid or is probable to be an allowed claim, with the contractual shortfall disclosed (852-10-45-11, 50-3). On emergence, fresh-start reporting is required only if reorganization value is less than postpetition liabilities plus allowed claims and pre-confirmation voting shareholders receive less than 50% of the emerging entity's voting shares (852-10-45-19), after which value is allocated using Subtopic 805-20 with residual goodwill, retained earnings resets to zero, and straddling comparative statements are prohibited (852-10-45-20, 45-21, 45-26). Subtopic 852-20 governs the out-of-court quasi-reorganization ("readjustment")—the express exception to the rule that additional paid-in capital may not relieve the income account (852-20-25-2)—requiring full disclosure to and formal shareholder consent, fair (not unduly conservative) asset carrying amounts, write-offs charged first to retained earnings then to APIC, and a new retained earnings account dated from the readjustment's effective date (852-20-25-3 through 25-5, 30-2, 50-2).

Subtopics

1. 10Overall76 ¶

   ASC 852-10 governs financial reporting by entities that have filed a Chapter 11 petition and expect to reorganize as going concerns, plus their reporting upon emergence under a confirmed plan. During the case, GAAP continues to apply but the statements must separate reorganization-related transactions from ongoing operations: prepetition liabilities subject to compromise are segregated on the balance sheet at expected allowed amounts, and reorganization items are shown separately in the income statement and cash flow statement. On emergence, an entity adopts fresh-start reporting only if reorganization value is less than postpetition liabilities plus allowed claims and pre-confirmation voting shareholders receive less than 50% of the emerging entity's voting shares.

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2. 20Quasi-Reorganizations30 ¶

   ASC 852-20 governs quasi-reorganizations ("readjustments"), a corporate readjustment procedure in which a corporation—without forming a new entity or entering court proceedings—restates its balance sheet to fair value, eliminates an accumulated deficit, and relieves current or future income of charges by charging them to additional paid-in capital. This is an express exception to the general rule in 852-20-25-2 that additional paid-in capital may not be used to relieve the income account. The Subtopic prescribes the conditions for the readjustment (full disclosure to and formal consent of shareholders, fair asset carrying amounts), the ordering of write-offs (retained earnings first, then APIC), and the post-readjustment dating of a new retained earnings account.

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