Fresh Start Accounting
March 6, 2017
What Business Leaders Should Know About Fresh-start Accounting
What is Fresh-start Accounting?
Fresh-start accounting, also known as fresh-start reporting, is a term used to describe the financial reporting required of companies exiting bankruptcy. Companies must present their assets, liabilities, and equity as a “new entity” on the day the company is dismissed from Chapter 11 bankruptcy protection. This record keeping enables the business to adjust its assets from the previous value to the current fair value at the time of reorganization. Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accountants are required to follow the regulations found in ASC 852 (formerly SOP 90-7) in establishing an opening balance sheet of the succeeding company.
Qualifications for Fresh-start Accounting
The fresh-start provisions of ASC 852, according to American Institute of Certified Public Accountants (AICPA), may only be applied by a company if both of the following conditions are met:
- The debtor’s reorganization value is less than post-petition liabilities and allowed claims (i.e., the debtor is “balance sheet” insolvent).
- Already existing voting shares immediately before confirmation receive less than 50 percent of the voting shares in the new, emerging entity.
If both criteria are met, the bankruptcy court confirms the company’s reorganization plan and fresh-start reporting is applied.
Benefits of Fresh-start Accounting
Fresh-start accounting creates a “clean” balance sheet for the company. This allows the business to eliminate its losses and restructure and discharge certain debts. As a result, the company can emerge out of bankruptcy with a clear financial picture. After a company qualifies for fresh-start accounting treatment, the balance sheet is completely reset and the company is able to restart as if it were a new entity.
The American Institute of Certified Public Accountants have implemented strict rules and timelines for implementing fresh-start reporting. The valuation process is critical and can prove to be extremely challenging due to the difficulty in determining factors such as the fair value of tangible and intangible assets, the start date for the reporting, best practices for value estimation, etc.
Independent Valuation Firms
An independent valuation firm can provide great value to help with the complexity of fresh-start reporting. Valuation professionals are able to provide relevant industry knowledge and an appropriate skill set to help with the intricate process including valuing tangible and intangible assets, bankruptcy accounting, SEC reporting, and tax structuring. Fresh-start accounting rules requires an in-depth understanding of valuation principles and methodologies; an independent valuation firm that has experience with these kinds of projects can prove to be highly valuable.
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