{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/852/20/","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","number":"852-20","topic":"852","title":"Quasi-Reorganizations","area":"Broad Transactions","paragraphs":30,"summary":"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.","concepts":["quasi-reorganization","readjustment","accumulated deficit elimination","additional paid-in capital","fresh-start-like restatement to fair value","dating of retained earnings","shareholder consent","asset carrying amounts"],"categories":["Debt and equity","Subsequent measurement","Disclosure","Financial statement presentation"],"level":"advanced","topic_title":"Reorganizations","sections":[{"number":"05","label":"05 Overview and Background","anchor":"05-overview-and-background","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"852-20-05-1","para":"05-1","html":"This Subtopic addresses the accounting applicable to a corporate readjustment procedure in which, without the creation of a new corporate entity and without the intervention of formal court proceedings, an entity restates its balance sheet to fair value. This corporate readjustment procedure may eliminate an accumulated deficit and/or prevent future charges to its income statement that otherwise would be made. The accounting permitted through such a procedure is an exception to the general rule discussed in paragraph
852-20-25-2.
Readjustments of this kind fall in the category of what are called quasi-reorganizations. This Subtopic does not deal with the general question of quasi-reorganizations, but only with cases in which the exception permitted in paragraph 852-20-25-2 is availed of by a corporation. Such cases are referred to as readjustments. The accounting and reporting issues that arise and are addressed in this Subtopic consist of what is permitted in a readjustment and what is permitted thereafter. This Subtopic does not address quasi-reorganizations involving only deficit reclassifications.
The guidance in this Subtopic applies to all public and nonpublic entities that are corporations.
The guidance in this Subtopic applies only to readjustments in which the current income, or retained earnings or accumulated deficit account, or the income account of future years is relieved of charges that would otherwise be made against it, and is therefore limited to readjustments of the type specified in paragraph 852-20-25-2. The guidance in this Subtopic does not apply to the following transactions and activities:
- a
Quasi-reorganizations involving only deficit reclassifications
- b
Charges against additional paid-in capital in other types of readjustments such as readjustments for the purpose of correcting erroneous credits made to additional paid-in capital in the past
- c
Financial reporting for entities that enter and intend to emerge from Chapter 11 reorganization, at the time of such reorganization.
This Section addresses the conditions under which a corporation may recognize a readjustment of its retained earnings or accumulated deficit balance.
The general requirement is that additional paid-in capital, however created, shall not be used to relieve the income account of the current or future years of charges that would otherwise be made to the income account. As an exception to this requirement, if a reorganized entity would be relieved of charges that would be required to be made against income if the existing corporation were continued, it may be permissible to accomplish the same result without reorganization provided the facts were as fully revealed to and the action as formally approved by the shareholders as in reorganization.
If a corporation elects to restate its assets, capital stock, additional paid-in capital, and retained earnings or accumulated deficit through a readjustment and therefore avail itself of permission to relieve its future income account or retained earnings account of charges that would otherwise be made against it, it shall make a clear report to its shareholders of the restatements proposed to be made, and obtain their formal consent. It shall present a fair balance sheet as at the date of the readjustment, in which the adjustment of carrying amounts is reasonably complete, in order that there may be no continuation of the circumstances that justify charges to additional paid-in capital.
When the amounts to be written off in a readjustment have been determined, they shall be charged first against retained earnings to the full extent of such retained earnings; any balance may then be charged against additional paid-in capital. An entity that has subsidiaries shall apply this rule in such a way that no consolidated retained earnings survive a readjustment in which any part of losses has been charged to additional paid-in capital. If the retained earnings of any subsidiaries cannot be applied against the losses before application against additional paid-in capital, the parent entity's interest in such retained earnings shall be regarded as capitalized by the readjustment just as retained earnings at the date of acquisition is capitalized, so far as the parent is concerned.
The effective date of the readjustment, from which the income of the entity is subsequently determined, shall be as near as practicable to the date on which formal consent of the stockholders is given, and shall ordinarily not be before the close of the last completed fiscal year. When the readjustment has been completed, the entity's accounting shall be substantially similar to that appropriate for a new entity.
Additional paid-in capital originating in such a readjustment is restricted in the same manner as that of a new corporation; charges against it shall be only those which may properly be made against the additional paid-in capital of a new corporation.
The accounting for tax benefits arising from deductible temporary differences and carryforwards related to a readjustment is addressed in Subtopic
852-740.
This Section provides guidance on the adjustment of accounts required by paragraph
852-20-25-3 as of the readjustment date in connection with the readjustments addressed by this Subtopic.
A write-down of assets below amounts that are likely to be subsequently realized, though it may result in conservatism in the balance sheet at the readjustment date, may also result in overstatement of earnings or of retained earnings when the assets are subsequently realized. Therefore, in general, assets shall be carried forward as of the date of readjustment at fair and not unduly conservative amounts, determined with due regard for the accounting to be subsequently employed by the entity.
If the fair value of any asset is not readily determinable a conservative estimate may be made, but in that case the amount shall be described as an estimate. Paragraph 852-20-35-2 describes the subsequent accounting for any material difference arising through realization or otherwise and not attributable to events occurring or circumstances arising after that date. Similarly, if potential losses or charges are known to have arisen before the date of readjustment but such amounts are then indeterminate, provision may properly be made to cover the maximum probable losses or charges.
Section
852-20-30 addresses the adjustments required to be made at the date of a readjustment addressed by this Subtopic. This Section addresses the subsequent accounting if the amounts determined as of the date of readjustment are found to have been excessive or insufficient.
If the fair value of any asset was not readily determinable and a conservative estimate was made at the date of the readjustment, any material difference arising through realization or otherwise and not attributable to events occurring or circumstances arising after that date shall not be carried to income or retained earnings. Similarly, if provisions for losses or charges established at the date of readjustment are subsequently found to have been excessive or insufficient, the difference shall not be carried to retained earnings nor used to offset losses or gains originating after the readjustment, but shall be recorded as additional paid-in capital.
This Section addresses an entity's disclosure requirements for periods following a readjustment within the scope of this Subtopic.
After such a readjustment, retained earnings previously accumulated cannot properly be carried forward under that title. A new retained earnings account shall be established, dated to show that it runs from the effective date of the readjustment, and this dating shall be disclosed in financial statements until such time as the effective date is no longer deemed to possess any special significance. The dating of retained earnings following a quasi-reorganization would rarely, if ever, be of significance after a period of 10 years. There may be exceptional circumstances in which the discontinuance of the dating of retained earnings could be justified at the conclusion of a period less than 10 years.
The following table identifies the changes made to this Subtopic.
See paragraph 852-20-S99-1, CFRR 210, for conditions necessary to effect a quasi-reorganization. See paragraph 852-20-S99-2, SAB Topic 5.S, Question 1, for SEC Staff views on reclassifying accumulated deficit without satisfying the conditions in CFRR 210 for reorganization. See paragraph 852-20-S99-2, SAB Topic 5.S, Question 2, for SEC Staff views on implementing an accounting change in conjunction with a quasi-reorganization. See paragraph 852-20-S99-2, SAB Topic 5.S, Question 3, for SEC Staff views on writing up assets in conjunction with a quasi-reorganization. See paragraph 852-20-S99-2, SAB Topic 5.S, Question 4, for SEC Staff views on accounting for the subsequent recognition of tax benefits that existed at the date of a quasi-reorganization. See paragraph 852-20-S99-2, SAB Topic 5.S, Question 5, for SEC Staff views on undoing a previous quasi-reorganization. The following is the text of FRR 210. Quasi-reorganization.
ASR 25: (5/29/41)
Inquiry has been made from time to time as to the conditions under which a quasi-reorganization has come to be applied in accounting to the corporate procedures in the course of which a company, without the creation of a new corporate entity and without the intervention of formal court proceedings, is enabled to eliminate a deficit whether resulting from operations of the recognition of other losses or both and to establish a new earned surplus account for the accumulation of earnings subsequent to the date selected as the effective date of the quasi-reorganization.
It has been the Commission's view for some time that a quasi-reorganization may not be considered to have been effected unless at least all the following conditions exist:
(1) Earned surplus, as of the date selected, is exhausted;
(2) Upon consummation of the quasi-reorganization, no deficit exists in any surplus account;
(3) The entire procedure is made known to all persons entitled to vote on matters of general corporate policy and the appropriate consents to the particular transactions are obtained in advance in accordance with the applicable law and charter provisions;
(4) The procedure accomplishes, with respect to the accounts, substantially what might be accomplished in a reorganization by legal proceedings—namely, the restatement of assets in terms of present conditions as well as appropriate modifications of capital and capital surplus, in order to obviate so far as possible necessity of future reorganizations of like nature.
It is implicit in such a procedure that reductions in the carrying value of assets at the effective date may not be made beyond a point which gives appropriate recognition to conditions which appear to have resulted in relatively permanent reductions in asset values; as for example, complete or partial obsolescence, lessened utility value, reduction in investment value due to changed economic conditions, or, in the case of current assets, declines in indicated realization value. It is also implicit in a procedure of this kind that it is not to be employed recurrently but only under circumstances which would justify an actual reorganization of formation of a new corporation, particularly if the sole or principle purpose of the quasi-reorganization is the elimination of a deficit in earned surplus resulting from operating losses.
In the case of the quasi-reorganization of a parent company, it is an implicit result of such procedure that the effective date should be recognized as having the significance of a date of acquisition of control of subsidiaries. Likewise, in consolidated statements, earned surplus of subsidiaries at the effective date should be excluded from earned surplus on the consolidated balance sheet.
The following is the text of SAB Topic 5.S, Quasi-Reorganization.
Facts: As a consequence of significant operating losses and/or recent write-downs of property, plant and equipment, a company's financial statements reflect an accumulated deficit. The company desires to eliminate the deficit by reclassifying amounts from paid-in-capital. In addition, the company anticipates adopting a discretionary change in accounting principles FN21 that will be recorded as a cumulative-effect type of accounting change. The recording of the cumulative effect will have the result of increasing the company's retained earnings.
Question 1: May the company reclassify its capital accounts to eliminate the accumulated deficit without satisfying all of the conditions enumerated in Section 210 FN22 of the Codification of Financial Reporting Policies for a quasi-reorganization?
Interpretive Response: No. The staff believes a deficit reclassification of any nature is considered to be a quasi-reorganization. As such, a company may not reclassify or eliminate a deficit in retained earnings unless all requisite conditions set forth in Section 210 FN23 for a quasi-reorganization are satisfied. FN24
FN23 Section 210 (ASR 25) indicates the following conditions under which a quasi-reorganization can be effected without the creation of a new corporate entity and without the intervention of formal court proceedings: 1. Earned surplus, as of the date selected, is exhausted; 2. Upon consummation of the quasi-reorganization, no deficit exists in any surplus account; 3. The entire procedure is made known to all persons entitled to vote on matters of general corporate policy and the appropriate consents to the particular transactions are obtained in advance in accordance with the applicable laws and charter provisions; 4. The procedure accomplishes, with respect to the accounts, substantially what might be accomplished in a reorganization by legal proceedings - namely, the restatement of assets in terms of present considerations as well as appropriate modifications of capital and capital surplus, in order to obviate, so far as possible, the necessity of future reorganization of like nature.
FN24 In addition, FASB ASC Subtopic 852-20, Reorganizations—Quasi-Reorganizations, outlines procedures that must be followed in connection with and after a quasi-reorganization.
Question 2: Must the company implement the discretionary change in accounting principle simultaneously with the quasi-reorganization or may it adopt the change after the quasi-reorganization has been effected?
Interpretive Response: The staff has taken the position that the company should adopt the anticipated accounting change prior to or as an integral part of the quasi-reorganization. Any such accounting change should be effected by following GAAP with respect to the change. FN25
FN25 FASB ASC Topic 250 provides accounting principles to be followed when adopting accounting changes. In addition, many newly-issued accounting pronouncements provide specific guidance to be followed when adopting the accounting specified in such pronouncements.
FASB ASC paragraph 852-20-25-5 (Reorganizations Topic) indicates that, following a quasi-reorganization, an \"entity's accounting shall be substantially similar to that appropriate for a new entity.\" The staff believes that implicit in this \"fresh-start\" concept is the need for the company's accounting principles in place at the time of the quasi-reorganization to be those planned to be used following the reorganization to avoid a misstatement of earnings and retained earnings after the reorganization. FN26 FASB ASC paragraph 852-20-30-2 states, in part, \"... in general, assets should be carried forward as of the date of the readjustment at fair and not unduly conservative amounts, determined with due regard for the accounting to be subsequently employed by the entity.\" (emphasis added) FN26 Certain newly-issued accounting standards do not require adoption until some future date. The staff believes, however, that if the registrant intends or is required to adopt those standards within 12 months following the quasi-reorganization, the registrant should adopt those standards prior to or as an integral part of the quasi-reorganization. Further, registrants should consider early adoption of standards with effective dates more than 12 months subsequent to a quasi-reorganization.
In addition, the staff believes that adopting a discretionary change in accounting principle that will be reflected in the financial statements within 12 months following the consummation of a quasi-reorganization leads to a presumption that the accounting change was contemplated at the time of the quasi-reorganization. FN27
FN27 Certain accounting changes require restatement of prior financial statements. The staff believes that if a quasi-reorganization had been recorded in a restated period, the effects of the accounting change on quasi-reorganization adjustments should also be restated to properly reflect the quasi-reorganization in the restated financial statements.
Question 3: In connection with a quasi-reorganization, may there be a write-up of net assets?
Interpretive Response: No. The staff believes that increases in the recorded values of specific assets (or reductions in liabilities) to fair value are appropriate providing such adjustments are factually supportable, however, the amount of such increases are limited to offsetting adjustments to reflect decreases in other assets (or increases in liabilities) to reflect their new fair value. In other words, a quasi-reorganization should not result in a write-up of net assets of the registrant.
Question 4: The interpretive response to question 1 indicates that the staff believes that a deficit reclassification of any nature is considered to be a quasi-reorganization, and accordingly, must satisfy all the conditions of Section 210. FN28 Assume a company has satisfied all the requisite conditions of Section 210, and has eliminated a deficit in retained earnings by a concurrent reduction in paid-in capital, but did not need to restate assets and liabilities by a charge to capital because assets and liabilities were already stated at fair values. How should the company reflect the tax benefits of operating loss or tax credit carryforwards for financial reporting purposes that existed as of the date of the quasi-reorganization when such tax benefits are subsequently recognized for financial reporting purposes?
Interpretive Response: The staff believes FASB ASC Subtopic 852-740, Reorganizations—Income Taxes, requires that any subsequently recognized tax benefits of operating loss or tax credit carryforwards that existed as of the date of a quasi-reorganization be reported as a direct addition to paid-in capital. The staff believes that this position is consistent with the \"new company\" or \"fresh-start\" concept embodied in Section 210, FN29 and in existing accounting literature regarding quasi-reorganizations, and with the FASB staff's justification for such a position when they stated that a \"new enterprise would not have tax benefits attributable to operating losses or tax credits that arose prior to its organization date. FN30 FN29 Section 210 (ASR 25) discusses the \"conditions under which a quasi-reorganization has come to be applied in accounting to the corporate procedures in the course of which a company, without creation of new corporate entity and without intervention of formal court proceedings, is enabled to eliminate a deficit whether resulting from operations or recognition of other losses or both and to establish a new earned surplus account for the accumulation of earnings subsequent to the date selected as the effective date of the quasi-reorganization.\" It further indicates that \"it is implicit in a procedure of this kind that it is not to be employed recurrently, but only under circumstances which would justify an actual reorganization or formation of a new corporation, particularly if the sole purpose of the quasi-reorganization is the elimination of a deficit in earned surplus resulting from operating losses.\" (emphasis added)
FN30 FASB ASC paragraph 852-740-55-4 states in part: \"As indicated in paragraph 852-20-25-5, after a quasi-reorganization, the entity's accounting shall be substantially similar to that appropriate for a new entity. As such, any subsequently recognized tax benefit of an operating loss or tax credit carryforward that existed at the date of a quasi-reorganization shall not be included in the determination of income of the \"new\" entity, regardless of whether losses that gave rise to an operating loss carryforward were charged to income prior to the quasi-reorganization or directly to contributed capital as part of the quasi-reorganization. A new entity would not have tax benefits attributable to operating losses or tax credits that arose prior to its organization date.\"
The staff believes that all registrants that comply with the requirements of Section 210 in effecting a quasi-reorganization should apply the accounting required by FASB ASC paragraph 852-740-45-3 for the tax benefits of tax carryforward items. FN31 FN32 Therefore, even though the only effect of a quasi-reorganization is the elimination of a deficit in retained earnings because assets and liabilities are already stated at fair values and the revaluation of assets and liabilities is unnecessary (or a write-up of net assets is prohibited as indicated in the interpretive response to question 3 above), subsequently recognized tax benefits of operating loss or tax credit carryforward items should be recorded as a direct addition to paid-in capital. Question 5: If a company had previously recorded a quasi-reorganization that only resulted in the elimination of a deficit in retained earnings, may the company reverse such entry and \"undo\" its quasi-reorganization?
Interpretive Response: No. The staff believes FASB ASC 250, Accounting Changes and Error Corrections, would preclude such a change in accounting. It states: \"a method of accounting that was previously adopted for a type of transaction or event that is being terminated or that was a single, nonrecurring event in the past shall not be changed.\" (emphasis added.) FN33