Corporate Finance REORGANIZATION Reorganization In a reorganization a

Corporate Finance REORGANIZATION

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

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.

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.

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

Reorganization Example

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

Assets Adjustment

Liabilities Adjustment

Shareholders’ Equity Adjustment

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

Comparative Balance Sheets

Comparative Balance Sheets