Chapter 17 CORPORATE LIQUIDATIONS AND REORGANIZATIONS Comprehensive Chapter Outline THE LAW OF BANKRUPTCY IS CONTAINED IN TITLE 11 OF THE UNITED

STATES CODE REFERRED TO AS THE BANKRUPTCY ACT !I""#$trat%&' 17(1) A B 1 The Bankruptcy Reform Act was passed in 1978 and it has been amended several times. rovisions of the Act and its amendments! The Bankruptcy Act created bankruptcy courts. a * The "urisdiction of the bankruptcy court covers all cases under Title 11 of #.$.%. %on&ress attempted to speed up bankruptcy cases with amendments to the Act in 199'. The court was &iven the authority to set dates by which certain parties to the bankruptcy case must complete their duties.

The Bankruptcy Act created the (ffice of #.$. Trustee. a * , e #.$. trustees are appointed by the attorney &eneral. #.$. trustees are responsible for the administration of bankruptcy cases. #.$. trustees maintain and supervise a panel of private trustees to serve in li)uidation cases. A #.$. trustee serves as trustee or interim trustee in some cases where a private trustee is not available. The #.$. trustee monitors appointed creditor committees and presides over creditor meetin&s.

The Bankruptcy Act provides for bankruptcy "ud&es that are appointed by *ederal Appeals %ourt +ud&es for a 1',year period. The role of the bankruptcy "ud&e is "udicial. The duties of the bankruptcy "ud&e include!

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$ettlin& disputes in the case. Approvin& all payments of debts incurred before the bankruptcy filin& -prepetition liabilities.. Approvin& all other payments that are considered e/traordinary.

%orporate bankruptcy cases 1 + . A case be&ins when a petition is filed under which the debtor is initially brou&ht into bankruptcy court. The petition may be filed by the debtor -a /&"#'tar0 *a'1r#pt,0 pr&,ee-%'2) or by creditors -an %'/&"#'tar0 *a'1r#pt,0 pr&,ee-%'2)3 The petition may be filed under %hapter 7 or %hapter 11 of the Bankruptcy Act. %hapter 11 petitions anticipate the reor&ani0ation of the debtor. %hapter 7 cases anticipate the debtor1s li)uidation. The Bankruptcy %ourt has the power to enter the order for relief -accept the petition.2 dismiss the case2 convert a %hapter 7 case to a %hapter 11 case2 or convert a %hapter 11 case to a %hapter 7 case.

CHAPTER 7 LIQUIDATION CASES A %ommencin& a %hapter 7 case! 1 + A %hapter 7 case is commenced voluntarily when the debtor corporation files a petition with the bankruptcy court. A %hapter 7 case is commenced involuntarily when a filin& is made by 3 or more creditors holdin& unsecured claims a&&re&atin& at least 4152555. A sin&le creditor with an unsecured claim of at least 4152555 can file if there are less than 16 unsecured creditors. a * . B The %ourt will accept the petition under %hapter 7 if the creditors prove their claims and the debtor does not contest the petition. The debtor may respond by filin& for protection under %hapter 11.

The filin& of a case creates an estate.

The #.$. trustee -or the bankruptcy "ud&e in non #.$. trustee districts. appoints an interim trustee to take possession of the debtor corporation1s estate until a trustee is elected. #nsecured creditors with undisputed claims vote for a trustee.

7lectin& a trustee re)uires that creditors holdin& at least 658 in amount of claims vote and that one candidate &ets the votes of creditors holdin& a ma"ority of the amount of claims votin&. 9f a trustee is not elected2 the interim trustee serves as trustee.

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#nsecured creditors that can vote also elect a creditors1 committee of 3 to 11 members. The trustee takes possession of the estate2 converts the estate assets into cash2 and distributes the proceeds accordin& to priority of claims2 as directed by the bankruptcy court. The trustee also! 1 + . 4 5 9nvesti&ates the financial affairs of the debtor. rovides information about the debtor1s estate and its administration to parties in interest. 7/amines creditor claims and ob"ects to claims that appear improper. The trustee may be able to void certain voidable preferences. (perates the debtor1s business if authori0ed to do so. *iles reports on trusteeship as re)uired by the court. %laims in a %hapter 7 case are paid accordin& to the schedule on pa&e :79 of the te/tbook! 1 %laims secured by valid liens are paid to the e/tent of the proceeds from the sale of the property pled&ed as security. Any amount of claim left over becomes an unsecured nonpriority claim. #nsecured priority claims are divided into : classes. The first class2 administrative e/penses of the li)uidation case2 are paid in full before the ne/t class -claims incurred between the date of filin& an involuntary petition and the date an interim trustee was appointed. receives any distribution. The second class is paid in full before the third class2 and so on. 9f cash is insufficient to pay all claims in a &iven class2 distributions are made on a pro rata basis. #nsecured nonpriority claims are divided into ' classes. A&ain2 the first class is paid in full before cash is distributed to the second class and so on. if there is insufficient cash for a class2 distributions within the class are made on a pro rata basis. $tockholders receive remainin& assets after all claims are paid.

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The $tate6e't &7 a77a%r$ is a financial statement that emphasi0es li)uidation values. 1 The statement shows balance sheet information with assets measured at

e/pected net reali0able values and classified on the basis of availability for fully secured2 partially secured2 priority2 and unsecured creditors. + . H ;iabilities are classified as priority2 fully secured2 partially secured2 and unsecured. The statement is prepared as of a specific date.

The $tate6e't &7 rea"%8at%&'$ a'- "%9#%-at%&'$ is an activity statement that shows pro&ress toward the li)uidation of a debtor1s estate. 1 + . 9t informs the court and interested creditors of the trustee1s accomplishments. The Bankruptcy Act does not re)uire this statement but allows the "ud&e to prescribe the form in which the information is presented in court. Basic financial statements with supportin& schedules can also meet this information need. The bankruptcy case is closed when the estate is fully administered and the trustee is dismissed.

CHAPTER 11 REORGANIZATION CASES A %ommencin& a %hapter 11 case 1 + . A case is initiated voluntarily when a debtor corporation files a petition with the bankruptcy court. A case is initiated involuntarily when creditors file a petition -in accordance with the same 4152555 claim limitations applicable to %hapter 7 filin&s.. 9f the court &rants the petition for protection from creditors2 it enters an order for relief under %hapter 11. Alternatively2 the court may dismiss the petition or convert the case to a %hapter 7 case.

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<hen the order for relief is &ranted2 the bankruptcy "ud&e appoints a #.$. trustee to administer the case. A private trustee may be appointed for cause2 but usually the debtor corporation retains possession of the estate. 9f the court appoints a private trustee for cause2 a party in interest may re)uest that a trustee be elected. This re)uest must be made within 35 days of the appointment of the private trustee. The #.$. trustee convenes a meetin& of creditors for the purpose of electin& one disinterested person to serve as trustee in the case. 1 The duties of the trustee or debtor in possession include!

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Bein& accountable for the debtor1s property2 includin& operations of the debtor1s business *ilin& a list of creditors2 schedules of assets and liabilities2 and a statement of financial affairs *urnishin& information and reports re)uested by the court about the estate and its administration 7/aminin& creditor claims and ob"ectin& to claims that appear improper *ilin& a reor&ani0ation plan or reportin& why one will not be filed *ilin& final reports as re)uired by the court. =e&otiatin& with creditors and stockholders throu&h creditors1 committees and e)uity holders1 committees

%reditors1 committees are responsible for protectin& the interests of the creditors they represent. All ne&otiations between the debtor and the prepetition creditors is carried on throu&h creditors1 committees. 1 + A creditors1 committee is appointed by the #.$. trustee as soon as practicable after the order for relief is &ranted. >enerally2 &overnmental units cannot serve on creditors committees? however2 in some cases2 the B>% can be a votin& member.

<hile operatin& under %hapter 112 the debtor corporation may be able to! 1 + . 4 5 Reduce labor costs throu&h layoffs2 contract rene&otiations2 or termination of pension plans Re"ect e/ecutory contracts and une/pired leases Reduce interest e/pense because interest on unsecured debt stops at the time the petition is filed revent foreclosure on the debtor1s assets -e/cept as permitted by the bankruptcy court. *orce a debt restructurin&

The re&r2a'%8at%&' p"a' must be fair and e)uitable to all interests concerned. 1 @urin& the first 165 days after the order of relief is filed2 only the debtor corporation can file a reor&ani0ation plan. The bankruptcy "ud&e can e/tend the

time reserved for the debtor to file a plan2 but once the e/clusivity period has e/pired2 any party of interest may file a plan. + %hapter 11 of the Bankruptcy Act re)uires that the reor&ani0ation plan must! a * , e 7 2 9dentify classes of claims -there are some e/ceptions. $pecify any class of claims that %$ '&t %6pa%re$pecify any class of claims that %$ %6pa%reTreat all claims within a particular class alike rovide ade)uate means for the plan1s e/ecution rohibit the issuance of nonvotin& e)uity securities %ontain provisions for the selection of officers and directors that are consistent with the interests of creditors2 e)uity holders2 and public policy

*or the bankruptcy court to confirm a plan2 each class of claims must have accepted the plan or not be impaired under it. <ithin each class2 each holder of a claim must either have accepted the plan or receive not less than that holder would receive if the debtor corporation were li)uidated. a * , %lasses of claims that are unimpaired are assumed to have accepted the plan. %lasses that receive nothin& are assumed to have re"ected it without the necessity of a vote. Acceptance of a plan by a class of claims re)uires approval of at least two,thirds in amount and over half in number of claims.

After the plan has been approved2 the court holds a confirmation hearin&. %onfirmation by the court constitutes dischar&e of the debtor e/cept for claims provided for in the reor&ani0ation plan.

FINANCIAL REPORTING DURING REORGANIZATION UNDER STATE:ENT OF POSITION ;<(7 A The balance sheet should present prepetition liabilities sub"ect to compromise separately from those not sub"ect to compromise. 1 + B Prepet%t%&' "%a*%"%t%e$ $#*=e,t t& ,&6pr&6%$e are the unsecured and undersecured liabilities incurred before the %hapter 11 filin&. L%a*%"%t%e$ '&t $#*=e,t t& ,&6pr&6%$e include fully secured liabilities incurred before the %hapter 11 filin& and all postpetition liabilities.

7ffects of reor&ani0ation on income and cash flow statements!

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7/penses directly related to the %hapter 11 proceedin&s are e/pensed as incurred. Revenues2 e/penses2 &ains2 and losses related to the reor&ani0ation are reported separately in the income statement as reor&ani0ation items. The amount of interest that will be paid durin& the bankruptcy proceedin&s2 or the probable amount to be allowed2 should be reported as interest e/pense. The difference from this amount and contractual interest should be disclosed in a financial statement note. 7arnin&s per share are reported as usual. %ash flow items relatin& to the reor&ani0ation should be disclosed separately from other cash flows.

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%onsolidated financial statements do not provide enou&h information about bankruptcy proceedin&s. Therefore2 SOP 90-7 re)uires that condensed combined financial statements for all entities in reor&ani0ation proceedin&s be presented as supplementary information. %onsolidation may be inappropriate for some subsidiaries in bankruptcy.

FINANCIAL REPORTING FOR THE E:ERGING CO:PANY A The re&r2a'%8at%&' /a"#e of a company appro/imates the fair value of the entity without considerin& liabilities. The reor&ani0ation value determines how much creditors will recover on their claims. *inancial reportin& depends on if the company emer&in& from bankruptcy is essentially a new company. An emer&in& company )ualifies for 7re$h $tart rep&rt%'2 if both of the followin& conditions are met! 1 The reor&ani0ation value immediately before the date of confirmation of the reor&ani0ation plan is less than the total of all postpetition liabilities and allowed claims2 and Aolders of e/istin& votin& shares immediately before confirmation of the reor&ani0ation plan receive less than B58 of the emer&in& entity. The loss of control must be substantive and not temporary.

*resh start reportin& results in a new reportin& entity with no retained earnin&s or deficit balance. 1 The reor&ani0ation value of the company is allocated to tan&ible and intan&ible assets accordin& to the purchase method of accountin&.

Any e/cess of reor&ani0ation value over tan&ible and identifiable intan&ible assets is an unidentifiable intan&ible asset2 Creor&ani0ation value in e/cess of the amount allocable to identifiable assets.D ;iabilities2 other than deferred income ta/es2 should be reported at their current value at the confirmation date. The final statements of the old entity should disclose the effects of the ad"ustments on the asset and liability accounts resultin& from fresh start reportin& and the effects of debt for&iveness. The endin& balance sheet of the old entity should be the same as the be&innin& balance sheet of the new entity2 includin& a 0ero retained earnin&s balance. @isclosures in the new balance sheet include those listed above for inclusion in the old balance sheet2 plus si&nificant factors relatin& to the determination of reor&ani0ation value.

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%ompanies that do not )ualify for fresh start reportin& should report liabilities compromised at their present values under the provisions of APB Opinion No. 21. 1 + @ebt for&iveness should be reported as an e/traordinary item. Euasi,reor&ani0ation accountin& should '&t be used.

De$,r%pt%&' &7 a$$%2'6e't 6ater%a" Euestions -66. 7/ercises 717,1 717,6 717,3 717,' 717,B roblems 17,1 17,6 17,3 17,' 17,B 17,: 17,7 -B. 13 F% &eneral )uestions -the bankruptcy act. ' F% &eneral )uestions -$( 95,7. G*reidrichHFoodyI %hapter 7 li)uidation -calculate e/pected recovery on a note. GBa/ter AardwareI %hapter 11 reor&ani0ation -determine if fresh start reportin& is applicable. GAolidayI %hapter 7 -show distribution of cash to holders of approved claims.

:%'#te$

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-7. G$cottI +ournal entries and financial statements -trustee accountin& for li)uidation case. G+ustinI %omputations of e/pected recovery for different classes of claims -%hapter 7 case. G*abulous *akesI $chedule of claims by priority rankin& and settlements -%hapter 7 case. GAannahI repare a statement of affairs and schedule of payments to each class :5 of claims -%hapter 7 case. G@awnI repare a statement of affairs and schedule of settlement to each class of claims -%hapter 7 case. G7verlast <indowI repare a statement of affairs and calculate the estimated settlement with unsecured creditors -%hapter 7 case. G;owstepI +ournal entries for reor&ani0ation plan and fresh start balance sheet -%hapter 11 case.

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ELECTRONIC SUPPLE:ENT TROUBLED DEBT RESTRUCTURINGS ARE ACCOUNTED FOR UNDER THE PRO>ISIONS OF FASB STATE:ENTS NO 15 AND 1143 A B A troubled debt restructurin& occurs when a creditor for reasons related to the debtor1s financial problems &rants a concession to the debtor it would not otherwise consider. Troubled debt restructurin&s are classified as! 1 + . Transfer of assets in full settlement -includin& foreclosures and repossessions. The &rant of an e)uity interest in full settlement A modification of terms -such as a reduction of interest rates2 e/tension of maturity2 or reduction of principal.

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A combination of the three listed above

A debt restructurin& is '&t a troubled debt restructurin& if the fair value of assets received or e)uity interest transferred at least e)uals the carryin& value of the receivable !,re-%t&r?$ /%e@p&%'t) or the payable !-e*t&r?$ /%e@p&%'t)3 @ebtor accountin& 1 <hen a debtor transfers assets in full settlement of a payable2 it reco&ni0es a &ain on restructurin& for the e/cess of the carryin& value of the payable over the fair value of the assets transferred. The debtor may also reco&ni0e a &ain or loss on the difference between the book value and the fair value of the asset transferred. This is not a restructurin& &ain. + <hen a debtor &rants an e)uity interest in full settlement of a payable2 it reco&ni0es a &ain on restructurin& for the e/cess of the carryin& value of the payable over the fair value of the e)uity interest. The debtor accounts for a modification of terms prospectively. a The carryin& amount of the payable does not chan&e unless it e/ceeds total future cash payments under the new terms. 9n this case2 the payable is reduced to future cash payments and a &ain is reco&ni0ed. <hen total future cash payments e/ceed the carryin& value of the payable2 the debtor calculates an effective interest rate that e)uates future cash payments and the carryin& amounts of the payable2 and applies that rate to determine interest e/pense and principal components in future payments.

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>ains on troubled debt restructurin&s are a&&re&ated and reported as an e/traordinary item net of ta/.

%reditor accountin& 1 Assets received from the debtor are recorded at their fair values at the time of restructurin&. The e/cess of the recorded amount of the receivable satisfied over the fair value of the assets received is recorded as a loss. <hen the terms of a receivable are modified2 the creditor measures the loan under the provisions of FAS 114 CAccountin& by %reditors for 9mpairment of a ;oan.D The loan is impaired when it is probable that the creditor will not be able to collect all the amounts due under the terms of the contract. a The loan impairment is based on the present value of the e/pected future cash flows discounted at the loan1s effective interest rate.

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The effective interest rate is the &r%2%'a" contractual rate. 9f the loan was ac)uired at a discount related to its credit )uality2 the effective interest rate is the discount rate that e)uates the present value of the investor1s estimate of the loan1s future cash flows with the purchase price of the loan.

9f the measure of the impaired loan is less than the recorded investment in the loan2 the creditor debits bad debt e/pense and credits the valuation allowance.

*or troubled debt restructurin&s that involve a combination of asset transfers2 e)uity interests2 and modification of terms2 the asset transfers and e)uity interests received by the creditor are measured and recorded before the modification of terms. %reditor disclosure re)uirements include! 1 The recorded investment in impaired loans includin&! a * + . the amount for which there is a related allowance for credit losses and the amount of the allowance the amount of that recorded investment for which there is no related allowance for credit losses

The creditor1s policy for reco&ni0in& interest on any impaired loans The avera&e recorded investment in impaired loans for each period and the time the loans were impaired within the period.

De$,r%pt%&' &7 a$$%2'6e't 6ater%a" :%'#te$ Euestions -3. roblems -9. <,' B F% &eneral )uestions -troubled debt restructurin&. <,B G@eadtrackI ayments to unsecured priority creditors <,: GJassumH>enairI +ournal entries for troubled debt restructurin& -asset transfer. <,7 GFilanH$tableI +ournal entries for troubled debt restructurin& -e)uity transfer. <,8 G%rashH%rimpI Euestions for troubled debt restructurin& <,9 AICPA ' F% problem,type )uestions -troubled debt restructurin&s. <,15 G@ownyI Troubled debt restructurin& "ournal entries -asset transfer and &rant of e)uity interest. <,11 G>arboI %alculate &ain or loss on troubled debt restructurin& <,16 G$tewartI +ournal entries -debtor and creditor accountin&. 16 15 16 1B 1B 65 1: 6B 35

I""#$trat%&' 17(1 STRUCTURE OF THE 1;7A BANKRUPTCY ;A< -A$ AF7=@7@. $ubstantive ;aw of Bankruptcy is !itle 11 "SC G#nited $tates %odeI !itle 11 "SC has 7 chapters! %hapter 1 %hapter 3 %hapter B %hapter 7 %hapter 9 %hapter 11 %hapter 13 >eneral rovisions Administration %reditors2 @ebtors2 and the 7state ;i)uidations Funicipalities Reor&ani0ations Re&ular 9ncome lan for individuals and small sole proprietorships -an Alternative to Bankruptcy.

!itle 2# "SC deals with! Bankruptcy %ourts -Ad"uncts to @istrict %ourts. Bankruptcy +ud&es -(ri&inally appointed by the resident2 but the Act was amended and now bankruptcy "ud&es are appointed by *ederal Appeals %ourt +ud&es. #.$. Trustees -Appointed by the Attorney >eneral , ilot pro"ect had 15 initial appointments2 but subse)uent amendments increased the number of #.$. trustees. Appointments are for terms of five years..

A TITLE 11 CASE A ,a$e is simply the filin& of a petition to brin& the debtor into bankruptcy court. 9t is filed in the district of the debtor1s principal place of business. A pet%t%&' may be filed either by the debtor or creditors! B B 9f filed by the debtor2 the case is /&"#'tar0 9f filed by creditors2 the case is %'/&"#'tar0

The pet%t%&' for business bankruptcy is filed B B #nder %hapter 7 -a %hapter 7 case. if li)uidation is e/pected #nder %hapter 11 -a %hapter 11 case. if rehabilitation -reor&ani0ation. is anticipated

F%"%'2 of a petition commences a %hapter 7 or 11 case B B *or voluntary cases2 filin& also constitutes the order for relief *or involuntary cases2 the order for relief is &ranted or denied by the bankruptcy court

A /&"#'tar0 pet%t%&' may be filed by the debtor with essentially no strin&s attached! B Fay be used to buy time -prevent creditors from demandin& immediate payment.. After the filin&2 creditors can only demand satisfaction throu&h the court. Fay be used to circumvent debt covenants -for e/ample2 after,ac)uired clauses that mi&ht prevent desired e/pansion2 or workin& capital or dividend provisions that become too restrictive. Fay be used to &et Cdebtor in possessionD status such that mana&ement retains control of the firm

An %'/&"#'tar0 pet%t%&' may be filed! B B By three or more entities with noncontin&ent2 unsecured claims totalin& at least 41525552 or By a sin&le creditor with an unsecured claim of at least 41525552 if the firm has fewer than 16 unsecured creditors

CHAPTER 7 CASES Tr#$tee 7&r a Chapter 7 Ca$e 1 + . @ebtor1s estate is turned over to an %'ter%6 tr#$tee as appointed by the court. A trustee may be elected by unsecured creditors at a creditors1 meetin& by ma$orit% vote of holders of at least 658 of unsecured claims. 9f a trustee is not elected2 the interim trustee continues as trustee for the case.

D#t%e$ &7 Tr#$tee >eneral! 1 + . Takes possession of the estate %onverts estate assets into cash @istributes proceeds by priority of claims

$pecific! 1 + . 4 5 C 9nvesti&ates affairs of the debtor rovides information to parties in interest 7/amines claims Koids preferences that are voidable (perates debtor1s business -if authori0ed to do so. *iles interim and final reports

The *a'1r#pt,0 ,&#rt has the power to 1 >rant the petition for relief + %onvert a %hapter 7 case -li)uidation. to a %hapter 11 case -reor&ani0ation. . %onvert a %hapter 11 case to a %hapter 7 case 4 @ismiss the case

RANKING OF CLAI:S IN CHAPTER 7 LIQUIDATION CASES I II $ecured claims ,, claims secured by valid liens #nsecured priority claims 1 + . 4 Administrative e/penses incurred in preservin& and li)uidatin& the debtor1s estate2 includin& trustee1s fees and le&al and accountin& fees %laims incurred between the date of filin& an involuntary petition and the date a trustee is appointed %laims for wa&es2 salaries2 and commissions earned within 95 days of filin& the petition and not e/ceedin& 4'2555 per individual %laims for contributions to employee benefit plans arisin& from services rendered within 185 days of filin& the petition and limited to 4'2555 per employee %laims of individuals not to e/ceed 412855 arisin& from the purchase2 lease2 or rental of property that was not delivered or the purchase of services that were not provided by the debtor %laims of &overnmental units for ta/es -sub"ect to certain limitations.

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#nsecured nonpriority claims 1 + . Allowed claims that were timely filed Allowed claims where proof of claims was filed late Allowed claims -secured and unsecured. for any fine2 penalty or forfeiture2 or for multiple2 e/emplary2 or punitive char&es arisin& prior to the order for relief or appointment of trustee %laims for interest on the unsecured priority claims or the unsecured nonpriority claims above

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$tockholders1 claims , Remainin& assets are returned to the debtor corporation or its stockholders

CHAPTER 11 CASES !REORGANIZATION) Tr#$tee 1 A private trustee may be appointed for cause -fraud or &ross mismana&ement.. <ithin 35 days2 a party in interest may re)uest that a trustee be elected. The #.$. trustee convenes a meetin& of creditors to elect a disinterested person to serve as trustee. 9f a trustee is not appointed2 the debtor corporation remains in possession -a debtor,in,possession case.

D#t%e$ &7 Tr#$tee !&r De*t&r %' P&$$e$$%&') 1 + Accountable for property of the estate -includin& operations. *ilin& with the court B B B . 4 5 C a list of creditors schedules of assets and liabilities statement of financial affairs rovidin& information about the estate and its administration 7/aminin& creditor claims *ilin& a reor&ani0ation plan *ilin& final reports on trusteeship

&' a trustee is not appointe( an eDa6%'er is appointed if loans to outsiders e/ceed 4B25552555 for other than &oods and services2 or if the court deems such appointment necessary. Committee )epresentation in a Chapter 11 Case B A creditors1 committee is appointed as soon as practicable B (ther committees of creditors and e)uity holders may be appointed Re&r2a'%8at%&' P"a' B (nly the debtor corporation can file a plan durin& the first 165 days B $ubse)uently2 the debtor company2 trustee2 creditors1 committees and other committees can file plans

O/era"" O*=e,t%/e &7 the Re&r2a'%8at%&' P"a' 1 + %onfirmation of a plan that is Cfair and e)uitableD The plan must B B B B B B 9dentify all classes of claims $pecify whether the class of claims is impaired Treat all claims of a class alike rovide ade)uate means for the plan1s e/ecution -retention of property2 mer&er2 modification2 etc.. rohibit the issuance of nonvotin& e)uity securities rovide for selection of officers and directors in line with public policy

A reor&ani0ation plan may provide for sale of property and distribution of proceeds. %hapter 11 reor&ani0ation cases may result in li)uidation if reor&ani0ation is not feasible. ACC*P!ANC* OF A )*O)+AN&,A!&ON P-AN F&r Ea,h C"a$$ &7 C"a%6$ B B Approval by 6H3 in amount of over half in number of claims But classes that are CunimpairedD are assumed to accept the plan and classes that receive nothin& are assumed to re"ect it

F&r C&'7%r6at%&' &7 the P"a' *0 the C&#rt B B 7ach class must have accepted the plan or not be impaired under it <ithin each class2 each holder of a claim must have voted for the plan or receive not less than if the corporation were li)uidated

The court may create a class of small claims for administrative e/pediency.

FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE !SOP ;<(7) (b"ective of financial statements prepared while a company is operatin& under %hapter 11 is to reflect the financial evolution durin& the bankruptcy proceedin&s. Transactions and events directly related to the reor&ani0ation should be distin&uished from those related to the on&oin& business operations. Ba"a',e Sheet repetition liabilities sub"ect to compromise are presented separately from liabilities not sub"ect to compromise. repetition liabilities sub"ect to compromise are the unsecured and undersecured liabilities incurred before the company entered %hapter 11. B B 7ntire amount of undersecured claims is included in this section repetition claims discovered after filin& are included at allowed amount

;iabilities not sub"ect to compromise include B B *ully secured liabilities incurred before the %hapter 11 filin& All postpetition liabilities -those incurred after the %hapter 11 filin& and not associated with prebankruptcy events.

I',&6e State6e't rofessional fees and e/penses related to the %hapter 11 proceedin&s are e/pensed as incurred and reported as reor&ani0ation items in the income statement. 9nterest paid durin& the proceedin&s or an amount that is probable to be allowed is reported as interest e/pense. 9nterest income earned as a result of the bankruptcy is reported as a reor&ani0ation item -&enerally all interest.. State6e't &7 Ca$h F"&@$ 9tems relatin& to reor&ani0ation are disclosed separately from those of the on&oin& operations.

C&'$&"%-ate- F%'a',%a" State6e't$ >enerally2 consolidated statements are prepared2 althou&h they may be inappropriate for some subsidiaries -if a trustee has been appointed2 for e/ample.. 9n addition2 condensed combined financial statements are re)uired for all entities in reor&ani0ation. F%'a',%a" Rep&rt%'2 7&r the E6er2%'2 C&6pa'0 A company emer&in& from bankruptcy proceedin&s is accounted for! B B As a new company with no retained earnin&s or deficit if it meets the )ualifications for fresh start reportin&2 or #nder the terms of A B (pinion =o. 61 whereby liabilities that are compromised are reported at their present values. *or&iveness of debt is reported as an e/traordinary item.

Reor&ani0ation Kalue B B B Appro/imates fair value of the entity without considerin& liabilities Appro/imates what a willin& buyer would pay for the assets at the time of restructurin& #sually determined by discountin& future cash flows for the reconstituted business2 plus proceeds from the sales of unnecessary assets

*resh start reportin& is used if both the followin& conditions are met! B B The reor&ani0ation value of the emer&in& entity1s assets immediately before confirmation of the reor&ani0ation plan is less than the total of all postpetition liabilities and allowed claims. 7/istin& holders of votin& shares immediately before confirmation of the reor&ani0ation plan receive less than B58 of the emer&in& entity. This loss of control cannot be temporary.

FRESH START REPORTING Assets B B Allocate the reor&ani0ation value to tan&ible and identifiable intan&ible assets under the purchase method of accountin& Any e/cess reor&ani0ation value is reported as an unidentifiable intan&ible asset2 LReor&ani0ation value in e/cess of amounts allocable to identifiable assets.D The e/cess is written off over a ma/imum of '5 years.

-ia.ilities B B B ;iabilities2 other than deferred income ta/es2 are reported at their current value at the confirmation date of the reor&ani0ation plan. @eferred income ta/es are reported as re)uired by *A$ 159. Benefits reali0ed from prior net operatin& loss carryforwards are applied first to reduce the Creor&ani0ation value in e/cess of amounts allocable to identifiable assetsD and then to other intan&ibles until e/hausted2 and finally2 as a reduction of income ta/ e/pense.

F%'a" State6e't$ &7 O"- E't%t0 should show! B B 7ffects of adoptin& fresh start reportin& on individual asset and liability accounts. 7ffects of debt for&iveness

I'%t%a" State6e't$ &7 Ne@ E't%t0 *irst balance sheet should be the same as the final balance sheet of the old entity2 includin& a 0ero retained earnin&s balance. B $i&nificant factors relatin& to the determination of reor&ani0ation value should be disclosed.