Corporate Liquidation and Reorganization PRESENTATION
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Transcript of Corporate Liquidation and Reorganization PRESENTATION
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PROF. JRR
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Corporate Liquidations andReorganizations
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Corporate Liquidations and
Reorganizations: Objectives
1. Understand differences among typesof bankruptcy filing.
2. Comprehend trustee responsibilitiesand accounting during liquidation.
3. Understand financial reporting duringreorganization.
4. Understand financial reporting afteremerging from reorganization,including freshstart accounting.
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1: TYPES OF !"#R$PTC%ES
Corporate Liquidations and Reorganizations
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%nso&venc'
!quity insol"ency %nabi&it' to pa' debts on ti(e )a' avoid ban*ruptc' proceedings
"egotiate direct&' +it, creditors
#ankruptcy insol"ency -aving tota& debts in e.cess o/ t,e /air va&ue
o/ assets )a' be &iquidated0 or Reorganized
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C,aracteristics
$oluntary bankruptcy proceedings Fi&ed b' debtor
%n"oluntary bankruptcy proceedings
Fi&ed b' creditor or group o/ creditors
Court action is(iss a case
!ccept t,e petition C,ange /or(
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2: TR$STEE
RESPO"S%%L%T%ES !"
!CCO$"T%"3
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Corporate Liquidations and Reorganizations
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uties o/ ebtor Corporation
%n both liquidation and reorganization cases,the debtor corporation must &ile a list of creditors, a schedule of assets
and liabilities, and a statement of financialaffairs
Cooperate 'ith trustee (urrender property to the trustee, including
records )ppear at court hearings
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uties o/ Trustee
*rustee ser"es in liquidation cases %n"estigate debtor+s financial affairs ro"ide information
!-amine, perhaps obect to, creditor claims &ile report on trusteeship %f authorized to operate debtor+s business,
other period reports are required
%n reorganization cases, in addition to abo"e &iling reorganization plan or statement 'hy
one cannot be filed
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Ran*ing o/ C&ai(s: Liquidation
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State(ent o/ !//airs
/egal document prepared for bankruptcycourt !ssets at e.pected net rea&izab&e va&ues
C&assi/ied on basis o/ avai&abi&it' /or c&asseso/ creditors
Liabi&ities are c&assi/ied
Priorit'0 /u&&' secured0 partia&&' secured0unsecured
-istorica& va&ues inc&uded /or re/erence
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Trustee !ccounting
)t start of case, trustee creates a ne' set ofbooks.0uring the case, Records transactions State(ent o/ cas, receipts and disburse(ents State(ent o/ c,anges in estate equit' a&ance s,eet
State(ent o/ rea&ization and &iquidation)t close of case, Fina& sett&e(ent o/ c&ai(s Trustee is dis(issed
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ebtor in Possession
Unless there is a reason to appoint atrustee, the debtor corporationsmanagement is permitted to continue torun the company 'hile in bankruptcy.
*he 0ebtor in ossession has the same
responsibilities as a trustee in areorganization case.
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Creditors4 Co((ittee
*he Creditors Committee is elected in aliquidation case, and is appointed in areorganization case from the largestunsecured creditors.akes decisions on behalf of all
creditorse"ie's ongoing transactions of the
debtor in possession and can obectandles negotiations 'ith any creditor
regarding settlement or continued
business.
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ene/its o/ C,apter
#enefits of being the 0ebtor in ossessioninclude5 eecting e-ecutory contracts Cancelling une-pired leases /egal protection from creditor action, such
as la'suits or repossession of property
o'e"er, daytoday operations may becomemore difficult as lenders, suppliers, customers,and employees are a'are of the bankruptcyfiling.
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Reorganization P&an
) plan may be filed at the time of the bankruptcyfiling 67prepackaged bankruptcy89 or by thedebtor corporation 'ithin 12: days of filing.;ther interested parties may file proposed plans
after 12: days. %dentify classes of claims (pecify the e-pected payout of each class Claims 'ithin a gi"en class must be treated
alike 0efine the e-pected requirements for
e-ecution of the plan ust be fair and equitable
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5: F%"!"C%!L REPORT%"3
$R%"3 REOR3!"%6!T%O"
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Corporate Liquidations and Reorganizations
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a&ance S,eet
repetition liabilities subect to compromiseare reported as a separate line item in liabilities !rose be/ore /i&ing
%nc&ude unsecured and under7secured &iabi&ities Li*e&' to be paid at an a(ount &ess t,an /ace va&ue
repetition secured liabilities and post petition
liabilities reported in normal fashion
repetition claims disco"ered after filing %nc&uded at court7a&&o+ed a(ounts
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Ot,er State(ents
eorganization costs sho'n separately
%nterest to be paid or probable amount i//erences /ro( contractua& a(ounts
s,ou&d be noted
!-pected stock or stock equi"alentissuances should be disclosed
Cash flo' items related to reorganizationsho'n separately
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Co(bined Financia& State(ents
Condensed combined financialstatements are prepared for all entities inreorganization proceedings assupplementary information %nterco(pan' receivab&es and pa'ab&es8rite7do+n i/ necessar'
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9: E)ER3%"3 FRO)
REOR3!"%6!T%O"
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Corporate Liquidations and Reorganizations
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Reorganization a&ue
)ppro-imates fair "alue of entity 'ithoutconsidering liabilities iscounted /uture cas, /&o+s o/ reorganized
business Consider business and /inancia& ris*
eorganization "alue determines ho' muchcreditors reco"er
!merging business 'ill either use1. &resh start reporting2. eport liabilities at present "alue and
forgi"eness of debt as e-traordinary item
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Fres,7Start Reporting
&resh(tart eporting recognizes that theemerging company is a ne' entity.
*o qualify,1; Reva&uation va&ue i((ediate&' be/ore t,e
reorganization p&an is con/ir(ed (ust be &ess
t,an post7petition &iabi&ities and a&&o+edc&ai(s0 and
2; -o&ders o/ e.isting voting s,ares receive &ess
t,an o/ e(erging entit'
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!pp&' Fres, Start Reporting
)llocated reorganization "alue to identifiableassets $na&&ocated a(ount is an intangib&e ca&&ed
?Reorganization va&ue in e.cess o/ a(ounts a&&ocated
to identi/iab&e assets@/iabilities at current "alue at confirmation date
e/erred ta. bene/its are /irst app&ied to reduce an'
intangib&e asset recorded
repare final reports of old entity T,e e//ects o/ adjust(ents to asset and &iabi&it'
accounts are s,o+n0 so t,at ending ba&ance s,eet
o/ o&d entit' A beginning ba&ance s,eet o/ ne+ entit'
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Continued Reporting o/ O&d Co(pan'
%f a company does not qualify for &resh(tarteporting, then
eport liabilities at the appropriate interestrate under
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Reorganization E.a(p&e
*ig files for protection under Chapter 11 on=anuary >, 2:11. )ccordingly, it reclassifies prepetition liabilities obtains shortterm financing acquires additional equipment continues operations through =une 3:, 2:12
'hen the plan is appro"ed, 'ith a
reorganization "alue of ?2,2::&irst, 'e+ll look at the statements pre and postreorganization. *hen 'e+ll go through theentries and adustments that occurred.
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a&ance S,eet !ssets
Filed
1/5/11FYE
12/31/11Before
6/30/12Re-
valuation
Fairvalue
6/30/12AFTER6/30/12
Cash 50 150 300 0 300 300
Aounts reeiva!le 500 350 335 0 335 335"nventor# 300 3$0 350 25 3$5 3$5
%ther urrent assets 50 50 30 0 30 30
&and 200 200 200 100 300 300
Buildin'( net 500 )50 )25 *$5+ 350 350E,ui.ent( net 300 330 20 *30+ 260 260
atent 200 150 125 *125+ 0 0
Reorganization value in excess of identifiable assets 250
2,100 2,050 2,055 (105) 1,950 2,200
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C,anges to !ssets
Fair values and revaluation amounts are shown on 6/30/12 forcomparison.
*ig continues operations, records depreciation, ande"en acquires equipment from filing on 1@>@11 to
reorganization on A@3:@12.
*he reorganization re"alues the assets to their fair"alue on that date. atents are completely 'rittenoff.
*ig records an intangible Beorganization "alue ine-cess of identifiable assetsB of ?2>:. Not allreorganizations result in this intangible.
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Filed
1/5/11FYE
12/31/11Before
6/30/12AFTER6/30/12
hort-ter. !orroin' *ost+ 150 $5 $5
Aounts a#a!le *re/ost+ 600 100 125 125
a'es a#a!le *ost+ 50 55 55
Ta4es a#a!le *re+ 150 150
Arued !ond interest *re+ 0
ote a#a!le *re+ 260
u!ordinated de!t *ost+ 35
12 !onds a#a!le 7 urrent *ost+ 10012 !onds a#a!le *ost+ 500
15 !onds a#a!le *re+ 1(200
Liabilities subject to compromise 2,300 2(300
Caital sto8 *old+ 500 500 500
a&ance S,eet 7 Liabi&it' B Equit'
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C,anges to Liabi&ities
Upon filing on 1@>@11, *ig reclassifies theunsecured and partially secured liabilities at thatpoint as repetition /iabilities (ubect toCompromise.
repetition /iabilities (ubect to Compromiseare then reclassified or settled according to theplan.
)ccounts payable on 12@31@11 does not includeany of the ?A:: due prior to filing.
*a-es payable are still to be paid, and e"entuallyrecorded again in full.
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C,anges to Equit'
(ome of the creditors recei"e stock in thereorganized firm. *he old shareholders alsorecei"e stock, but no' o'n only ?1:: of ?:: ofthe stock at book "alue.
)lthough some )%C 'as recorded inreorganizing, it 'as subsequently eliminated. fit had been sufficient to wipe out the deficit! no
intangible "reorganization value in e#cess ofidentifiable assets" would be recorded.
*he 0eficit is remo"edD
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Can Tig $se Fres, Start
;n A@3:@12 there 'ere ?2>> in postpetitionliabilities. )ll ?2,3:: prepetition liabilities 'ereallo'ed by the courts. &irm "alue is ?2,2::.
1; Liabi&ities e.ceed reorganization va&ue2; O&d s,are,o&ders retain &ess t,an
Ees, fresh start is appropriate.
ost-etition lia!ilities :255Alloed lai.s 2(300
Total lia!ilities :2(555
&ess reor'ani;ation value *2(200+
E4ess lia!ilities :355
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Reorganization P&an: D5=12
Pre-petitionLiabilities and !uit" #e$ %&reements Debt Dis-c'ar&e
15 artiall# seured!onds( :1200
:500 ne sto8( :500senior 12 !onds( andanother :100 !onds due12/31/12 :100
riorit# ta4 lai.s :150 To !e aid ash oneonfir.ed :0
Remaining unsecured claims, $950:
:600 aounts a#a!le :2$5 su!ordinated de!t
and :1)0 ne sto8 :195:0 arued interest For'iven :0
:260 note :120 su!ordinated de!tand :60 ne sto8 :90
otal debt disc'ar&ed *55
%ld sto8 :100 ne sto8 E uit
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Record "e+ ebt !gree(ents
*his entry reclassifies the prepetition debtaccording to the reorganization plan.
&ia!ilities su!
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3ive S,are,o&ders "e+ S,ares
*hey 'ill lose control since creditors ha"e?F:: of common stock.
Co..on sto8 *old+ 500
Co..on sto8 *ne+ 100
Additional aid in aital )00
exchange of stock with owners
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Reva&ue !ssets
) loss is recorded in re"aluing the assets. eferback to the )sset side of the balance sheet.
"nventor# 25
&and 100
Loss on asset re+aluation 105
Buildin's( net $5
E,ui.ent( net 30
atent 125
revalue assets to fair value
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Ca&cu&ate a&ance in Retained
Earnings e/icitG
%f sufficient )%C had e-isted, there 'ould beno intangible asset, and e-cess )%C 'ouldremain on the balance sheet.
>efiit( 6/30/12 *1(000+
=ain on de!t dishar'e )55
&oss on asset revaluation *105+
Final .easure of defiit( 6/30/12 *:650+
rite-off Additional aid in aital )00
eor&aniation +alue in e.cess ofidentifiable assets (intan&ible asset) (250)
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E&i(inate e/icit in Equit'
*he ?1,::: deficit on A@3:@12 is adusted forthe gain on debt discharge and loss on assetre"aluation. *he net ?A>: deficit eliminatesall of the )%C and creates a ?2>: intangible.
eor&aniation +alue in e.cess ofidentifiable assets 250
=ain on de!t dishar'e )55
Additional aid in aital )00
&oss on asset revaluation 105
Deficit 1,000
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Si(p&i/'ing !ssu(ptions
)ll transactions are recorded onA@3:@12.
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isc&osures
)dustments to historical "alues !ssets Liabi&ities
0ebt forgi"eness
rior retained earnings or deficit eliminated
(ignificant factors in determining thereorganization "alue
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