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Entities may incur professional fees in conjunction with obtaining debtor-in-possession financing while in bankruptcy. Questions often arise as to whether such fees should be expensed as incurred as reorganization items in accordance with ASC 852-10-45-10 or deferred and amortized over the life of the debt as accounted for outside bankruptcy. ASC 852-10-45-10 provides guidance on the treatment of professional fees.

ASC 852-10-45-10

It is not appropriate to defer professional fees and similar types of expenditures until the plan is confirmed and then reduce gain from debt discharge to the extent of the previously deferred expenses. It is also not appropriate to accrue professional fees and similar types of expenditures upon the filing of the Chapter 11 petition. Rather, because professional fees and similar types of expenditures directly relating to the Chapter 11 proceeding do not result in assets or liabilities, they shall be expensed as incurred and reported as reorganization items.

In making such a determination, the reporting entity should consider whether the related debt will be paid in full prior to emergence from bankruptcy or remain outstanding and continue after emergence. In many cases, the costs related to debtor-in-possession financing for debt that will be paid in full prior to emergence from bankruptcy are expensed as incurred as reorganization items. We are aware of an alternative approach to defer and amortize these costs over the expected term of the debtor-in-possession financing. As the contractual term of the financing is usually based on the time that that the debtor is in bankruptcy, reporting entities should update the expected term each reporting period. Under this approach, amortization of the deferred debt issuance costs is recorded as interest expense, which is presented outside of reorganization items.
Professional fees that become payable upon emergence from bankruptcy, often referred to as contingent fees or success fees, should be expensed upon emergence and recorded within reorganization costs. For a reporting entity qualifying for fresh-start reporting, such costs would be recognized by the predecessor entity at emergence. Professional fees, with perhaps the exception of certain debt issue costs as mentioned above, should not be capitalized for a reporting entity in bankruptcy.
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