Bankruptcy Consulting

Depending on the entity’s structure, the new entity may need to restate their balance sheet and equity section using fresh start accounting. Fresh start accounting helps organizations adopt appropriate emergence accounting, as governed by the Financial Accounting Standards Board’s Accounting Standards Codification^® (ASC) 852, Reorganizations. Many of the standards used in fresh start accounting resemble the principles used in purchase accounting.

Steps to Take:
These reorganization standards require the company to prepare financial statements using four basic steps:

1. Prepare the books and records of the predecessor entity.
2. Record the effects of the reorganization plan, including the extinguishing of pre-petition liabilities and of the common stock of the predecessor entity, recoveries to creditors and reorganization of gain/loss provided by the previously discussed activities.
3. Complete the revaluation and balance sheet adjustment of the assets and liabilities of the new entity.
4. Prepare the financial statements of the new entity to reflect all adjustments made during this process.

There may be an opportunity for the new entity to preserve a significant tax benefit by maintaining its net operating loss (NOL) post-bankruptcy. However, complex rules, including Section 382 of the Internal Revenue Code, if not handled correctly could place limitations on a bankrupt company's ability to preserve the full value of that asset through bankruptcy proceedings.