Bankruptcy reporting / fresh-start accounting
Content on this page pertains to the complex accounting aspects of bankruptcy reporting. Please visit PwC's Restructuring and recovery page for other key elements to consider.
Filing for bankruptcy can be a difficult time for all parties concerned. On day one, immediate filing requirements are triggered for a host of recipients including, but not limited to, the bankruptcy courts and shareholders. Many of these filings involve the application of a different basis of accounting which substantially increases the volume of activities in the finance and accounting functions of the organization.
Both before and after the bankruptcy process, accounting and valuation challenges may result due to the application of the bankruptcy standard. An example of a specific challenge includes presenting balance sheet liabilities between items that are fully secured and those that may be subject to compromise. Additionally, companies must determine the appropriate presentation of expenses related to the bankruptcy and consider the various valuation matters pre- and post-emergence.
Accounting for reorganizations can be complex and requires a significant amount of planning. The key to success is obtaining a deep understanding of the issues and having a well-reasoned approach to meeting those challenges, well in advance of having to deal with the issues.
Steve Lilley, Partner
Impacts to companies:
- Prior to filing for bankruptcy, systems will need to be tailored to properly classify liabilities as pre- or post-petition. Pre-petition liabilities will be required to be frozen in the system until the case is adjudicated or specific relief is given to the vendor.
- Liabilities require analysis to determine whether they are fully secured or will be subject to compromise.
- Material contracts, including executory contracts, need to be reviewed to determine if they are unfavorable or favorable to the estate. Unfavorable contracts may be rejected.
- Various valuations may need to be performed during the bankruptcy continuum including liquidation basis, existing GAAP basis and new basis (if the company qualifies for fresh start accounting upon emergence).
- If the company qualifies for fresh start accounting, the new basis valuation will need to be properly recorded on the balance sheet upon emergence.
- Substantial information demands from the enterprise reporting software to meet the needs of the various stakeholders, typically at a time when company resources are already stretched thin.
What companies should do:
- Develop a clear roadmap of the key milestones during bankruptcy that lead up to emergence. Using the roadmap, a detailed task plan can be developed to meet the reporting expectations during the bankruptcy process.
- Determine the required valuation needs during the bankruptcy period and create a plan to meet those requirements. Early planning related to valuation may lead to substantial savings by utilizing the same dataset for various analyses.
- Prepare an IT roadmap that incorporates changes to the existing configuration to aid in the recording of transactions pre bankruptcy, during bankruptcy and upon emergence from bankruptcy.