Chapter 11 Assistance for Companies | FTI Consulting

Chapter 11 Reorganizations & Accounting Advisory Assistance for Companies

SEC & Accounting Advisory Services

Forensic & Litigation Consulting

April 27, 2020

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In the wake of the COVID-19 pandemic, an increasing number of public and private companies will face a reality of assessing going concern and navigating the many accounting challenges presented when adopting and entering Chapter 11 reorganization offered under the U.S. Bankruptcy Code.

This process commences when an entity files its petition with the Bankruptcy Court and begins to prepare a plan of reorganization, which ultimately dictates the treatment of the assets and liabilities of the petitioning entity (the "debtor").

Determining the reorganization value of the debtor entity that will emerge from bankruptcy is a critical step in developing a plan of reorganization. Reorganization value has been defined in U.S. Generally Accepted Accounting Principles ("U.S. GAAP") as "the value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the restructuring."1

The Bankruptcy Court presides over Chapter 11 reorganization proceedings and is responsible for overall and final approval of the debtor’s reorganization plan. The confirmation and approval of the plan of reorganization discharges the debtor from certain (secured and unsecured) creditor claims and provides for other remedies.

U.S. GAAP Accounting Considerations

During and following the reorganization proceedings, debtors will need to consider and apply the U.S. GAAP accounting requirements stipulated in ASC 852 – Reorganization ("ASC 852"). These requirements can allow companies to adopt and benefit from a "fresh start" – effectively, emerging as a new reporting entity with a new balance sheet following the completion of Chapter 11 proceedings.

Footnotes:

1: FASB Codification – Master Glossary – Reorganization Value


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