INTERMEDIATE

ACCOUNTING
TENTH CANADIAN EDITION

Kieso Weygandt Warfield Young Wiecek McConomy

CHAPTER 15
Appendix 15B
Financial Reorganization

PREPARED BY:
Lisa Harvey, CPA, CA
Rotman School of Management, University
of Toronto
1

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

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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

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Canada, Ltd.

Comprehensive
Revaluation
Under ASPE, requires three steps:
1. Deficit (retained earnings) brought to a zero
balance
Pre-existing write-downs and impairments recorded
before the deficit balance is written 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
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Reorganization Example
New Horizons applies for financial
reorganization as at June 30, 2014
Retained Earnings

$1 million deficit

Negotiated Terms
$150,000 in existing debt exchanged for 100%
of the common shares
Original shareholders give up all shares
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Canada, Ltd.

Reorganization Example
1.Record asset impairments pre-reorganization
Deficit (R/E)
750,000
Inventory
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
Buildings 400,000
Notes Payable 150,000
Common Shares550,000
Copyright John Wiley & Sons
Canada, Ltd.

Reorganization
Requirements
Under ASPE, there must be change in control to
apply comprehensive revaluation
In addition, following requirements must be met:
1.Shareholders approve the reorganization before
it is effected
2.Asset and liability valuation are at fair value
3.Retained earnings has zero balance immediately
following reorganization
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Canada, Ltd.

Reorganization Disclosure
1. In the period of reorganization

Date of reorganization
Description of reorganization
Change amount for each major asset, liability and
equity account
2. In following period and subsequent reports

Date of reorganization
Revaluation adjustment amount and which
account in which it was recorded
Amount of deficit that was reclassified and to
which account
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Canada, Ltd.

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