Prepared by: Patricia Zima, CA Mohawk College of Applied Arts and Technology Chapter 15B Financial Reorganization

2 Financial Reorganization Process where a company that has undergone financial difficulties can reorganize its finances without having to recover a deficit Agreement is reached between debt and equity holders on process details Referred to as fresh start accounting

3 Financial Reorganization Some debt holders, and all equity holders, give up their right to receive certain future funds Change in control of the company usually results Comprehensive revaluation of all assets and liabilities

4 Comprehensive Revaluation 1.Retained earnings brought to zero balance – Deficit balance removed – Pre-existing write-downs and impairments recorded before retained earnings write-off 2.Negotiated debt and equity changes recorded – Debt may be exchanged for equity (change in control) 3.Remaining assets and liabilities revalued – Revaluation adjustments and related costs are equity transactions – Closed to Share Capital, Contributed Surplus, or other equity account

5 Reorganization Example New Horizons applies for financial reorganization as at June 30, 2008 Retained Earnings$1,000,000 deficit Negotiated Terms $150,000 in existing debt exchanged for 100% of the common shares Original shareholders give up all shares

6 Reorganization Example 1.Record asset impairments pre-reorganization Deficit(R/E) 750,000 Inventories 225,000 Intangible Assets 525,000 2.Eliminate Deficit Common Shares 1,750,000 Deficit (R/E) 1,750,000 3.Restate asset and liability values, record change in control Assets400,000 Liabilities150,000 Common Shares550,000

7 Reorganization Requirements 1.Shareholders approve the reorganization before it is effected 2.Asset and liability valuation are at fair market value 3.Retained earnings has zero balance immediately following reorganization

8 Reorganization Disclosure 1.In the period of reorganization a.Date of reorganization b.Description of reorganization c.Change amount for each major asset, liability and equity account 2.Each of the three years following reorganization a.Date of reorganization b.Revaluation adjustment amount, and which account recorded to c.Amount of deficit adjusted, and to which account d.Measurement basis for the revaluation of assets and liabilities

9 Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. COPYRIGHT