1. TENTH CANADIAN EDITION INTERMEDIATE ACCOUNTING PREPARED BY: Lisa Harvey, CPA, CA Rotman School of Management, University of Toronto 1 CHAPTER 15 Appendix 15B Financial Reorganization Kieso Weygandt Warfield Young Wiecek McConomy

2. Financial Reorganization Process where a company that has undergone financial difficulties can reorganize its finances without having to recover a deficit Agreement is reached between debt and equity holders on process details Referred to as fresh start accounting Copyright John Wiley & Sons Canada, Ltd. 2

3. Financial Reorganization Some debt holders, and all equity holders, give up their right to receive certain future funds Change in control of the company usually results Comprehensive revaluation of all assets and liabilities Copyright John Wiley & Sons Canada, Ltd. 3

4. Comprehensive Revaluation Under ASPE, requires three steps: 1.Deficit (retained earnings) brought to a zero balance – Pre-existing write-downs and impairments recorded before the deficit balance is written off 2.Negotiated debt and equity changes recorded – Debt may be exchanged for equity (change in control) 3.Remaining assets and liabilities revalued – Revaluation adjustments and related costs are equity transactions – Closed to Share Capital, Contributed Surplus, or other equity account Copyright John Wiley & Sons Canada, Ltd. 4

5. Reorganization Example Copyright John Wiley & Sons Canada, Ltd. 5 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 shares

6. Reorganization Example 1.Record asset impairments pre-reorganization Deficit(R/E) 750,000 Inventory 225,000 Intangible Assets 525,000 2.Eliminate Deficit Common Shares 1,750,000 Deficit (R/E) 1,750,000 3.Restate asset and liability values, record change in control Buildings400,000 Notes Payable150,000 Common Shares550,000 Copyright John Wiley & Sons Canada, Ltd. 6

7. Reorganization Requirements Under ASPE, there must be change in control to apply comprehensive revaluation In addition, following requirements must be met: 1.Shareholders approve the reorganization before it is effected 2.Asset and liability valuation are at fair value 3.Retained earnings has zero balance immediately following reorganization Copyright John Wiley & Sons Canada, Ltd. 7

8. Reorganization Disclosure 1.In the period of reorganization Date of reorganization Description of reorganization Change amount for each major asset, liability and equity account 2.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. 8

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