1. Corporate Finance
reorganization

2. Reorganization
In a reorganization, a company prepares a plan of reorganization which is negotiated with creditors so that creditor claims are settled and the company can continue to operate.
Timeline
“Filing”: date the bankruptcy begins
“Reorganization”: date the bankruptcy ends

3. Reclassification/Balance Sheet
Assets recorded at reorganization value (= fair value).
Fully secured liabilities are recorded at full amount.
Unsecured and partially secured liabilities:
Liabilities subject to compromise
Creditors receive a negotiated settlement
Post-filing liabilities are recorded at full amount.
Shareholders’ equity is renegotiated to a lower amount.

4. Fresh Start Reporting Two requirements:
Pre-reorganization asset value is less than negotiated liabilities amount in reorganization.
Pre-reorganization shareholders receive less than 50% of post-reorganization entity.
The emerging entity is in effect a new company.

5. Reorganization Example
Filing date 5-Jan-2013; Reorganization date 30-Jun-2014

6. Reorganization Example

7. Reorganization Plan Liabilities subject to compromise
Accounts payable: $275,000 long term debt, $140,000 stock
Taxes payable: to be paid in full
Notes payable: $120,000 long term debt, $60,000 stock
Bonds payable: $600,000 long term debt, $500,000 stock (NOTE: loan amount > market value of building)
No adjustment to post-filing liabilities
Equity holders: $100,000 stock

8. Assets Adjustment

9. Liabilities Adjustment

10. Shareholders’ Equity Adjustment

11. Excess Reorganization Value Calculation
“Excess reorganization value” is a long-term asset; it is not amortized, but is evaluated annually for impairment.

12. Comparative Balance Sheets

13. Comparative Balance Sheets