The primary method of distinguishing transactions and events associated with the reorganization in the income statement is through the use of a separate line for reorganization items. The reporting entity uses this category to reflect the revenues, expenses, gains, and losses that are the result of the reorganization of the business during the bankruptcy.
Judgment is required in determining which items should be reported as reorganization items within the income statement. Items are only classified as reorganization items during bankruptcy if they result from the reorganization of the business. No activity should be classified as a reorganization item before the bankruptcy filing or after bankruptcy emergence, even if the activity relates to the bankruptcy. In addition:
- It would be rare to report revenues as a reorganization item.
- As a general rule, only incremental costs directly related to the reporting entity’s bankruptcy filing, such as professional fees for bankruptcy services, should be presented as reorganization items.
- Recurring internal costs of normal operations should not be presented as reorganization items.
- Impairment charges and restructuring activities would also not usually be considered reorganization items because these costs are associated with the ongoing operations of the business.
- Adjustments relating to prepetition estimates of liabilities, or the correction of errors, would not typically be recorded as reorganization items.
- Changes in the balance sheet accounts from the application of the principles of ASC 852-10, such as adjustments to the expected amount of the allowed claims for liabilities subject to compromise discussed earlier, should be recorded as reorganization items.
- The related tax effects from reorganization items should be reflected in income tax expense.
In summary, only those costs initiated directly as a result of the bankruptcy filing and which would not have otherwise been incurred by the reporting entity may be presented as reorganization items. For example, a debtor may reject a lease during bankruptcy as part of a broad restructuring plan to exit an unprofitable region or product offering. It may not be appropriate to classify the gain or loss related to the lease termination as a reorganization item. The debtor would have to assess whether it would have exited the unprofitable region or product offering regardless of the bankruptcy. If the bankruptcy filing was not the direct cause of the impairment charge or the restructuring activity, then the activity should generally not be recorded as a reorganization item.
Reorganization activities associated with a component that is required to be reported as discontinued operations under
ASC 205-20,
Presentation of Financial Statements, should be separately reported as reorganization items within the discontinued operations section of the income statement. Accordingly, for disposal transactions that qualify as discontinued operations, the gain or loss associated with the sale of assets, and the related selling costs, would also be recorded as discontinued operations.
For disposal transactions that do not qualify as discontinued operations, a question may arise as to how a reporting entity should classify the gain or loss associated with the sale of assets, and the related selling costs, which are completed as part of a Court-approved plan of reorganization. It is generally expected that disposal gains or losses, and the related selling costs, would be recognized as part of ongoing operations. However, such amounts may be included as a reorganization item when the reporting entity is able to demonstrate that the asset is being sold only as a direct result of its bankruptcy proceedings as required by a Court-approved plan and would not have otherwise been disposed of in the ordinary course of business.
In accordance with
ASC 852-10-45-12, interest income earned by a reporting entity in bankruptcy that would not have been earned except for the proceedings, which often occurs because the debtor is not allowed to pay prepetition debts during the proceedings, should be reported within reorganization items. However, in accordance with
ASC 852-10-45-2, if a reporting entity can reasonably estimate the portion of interest income applicable to its normal invested working capital, and thus, can distinguish that portion as related to the ongoing operations of the business, it should report that amount separately within the income statement.
Figure BLG 3-6 provides an example of a footnote disclosure for reorganization items for a reporting entity in bankruptcy.
Figure BLG 3-6
Sample note disclosure (abridged) 1 – Reorganization items
Professional advisory fees and other costs directly associated with our reorganization are reported separately as reorganization items pursuant to
ASC 852-10. Professional fees include legal and other advisory fees related to the bankruptcy proceedings. Reorganization items also include provisions and adjustments to the carrying values of debt and certain other prepetition liabilities to reflect their Court-approved settlement amounts. The reorganization items in the consolidated income statement for the year ended December 31, 20X1, consisted of the following items:
|
Year ended December 31, 20X1 |
Debt valuation adjustments |
|
|
5 |
Other prepetition liabilities adjustments |
|
|
15 |
Total reorganization items, net |
|
$ |
65 |
1 The sample note disclosure illustrates an abridged version of what a reporting entity in bankruptcy would disclose for reorganization items. It is not meant to be an all-inclusive representation of what information would need to be disclosed in the note. A reporting entity should consider the specific facts and circumstances surrounding its reorganization items and disclose accordingly.