Appendix 15B Financial Reorganization Kieso Weygandt Warfield Young Wiecek McConomy Financial Reorganization Process where a company that has undergone financial difficulties can reorganize its finances without having to recover a deficit ID: 390010
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CHAPTER 15Appendix 15BFinancial Reorganization
Kieso
•
Weygandt
• Warfield • Young •
Wiecek
•
McConomySlide2
Financial ReorganizationProcess where a company that has undergone financial difficulties can reorganize its finances without having to recover a deficitAgreement is reached between debt and equity holders on process details
Referred to as fresh start accountingCopyright John Wiley & Sons Canada, Ltd.
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Financial ReorganizationSome debt holders, and all
equity holders, give up their right to receive certain future fundsChange in control of the company usually resultsComprehensive revaluation of all assets and liabilities
Copyright John Wiley & Sons Canada, Ltd.
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Comprehensive RevaluationUnder
ASPE, requires three steps:Deficit (retained earnings) brought to a zero balancePre-existing write-downs and impairments recorded before the deficit balance is written off
Negotiated debt and equity changes recorded
Debt may be exchanged for equity (change in control)
Remaining assets and liabilities revalued
Revaluation adjustments and related costs are equity transactions
Closed to Share Capital, Contributed Surplus, or other equity account
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Reorganization ExampleCopyright John Wiley & Sons Canada, Ltd.
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New Horizons applies for financial reorganization as at June 30,
2014
Retained Earnings $1 million deficit
Negotiated Terms
$150,000 in existing debt exchanged for 100% of the common shares
Original shareholders give up all sharesSlide6
Reorganization Example
Record asset impairments pre-reorganizationDeficit (R/E) 750,000 Inventory 225,000 Intangible Assets 525,000Eliminate Deficit
Common Shares 1,750,000
Deficit
(R/E)
1,750,000
Restate asset and liability values, record change in control
Buildings
400,000
Notes Payable
150,000
Common Shares 550,000
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Reorganization RequirementsUnder ASPE, there must be change in control to apply comprehensive revaluation
In addition, following requirements must be met:Shareholders approve the reorganization before it is effected
Asset and liability valuation are at
fair value
Retained earnings has
zero balance
immediately following reorganization
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Reorganization DisclosureIn the period of reorganization
Date of reorganizationDescription of reorganizationChange amount for each major asset, liability and equity account
In following period and subsequent reports
Date of reorganization
Revaluation adjustment
amount
and which account
in which it was recorded
Amount of deficit
that was reclassified
and to which account
Copyright John Wiley & Sons Canada, Ltd.
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