There are various reporting considerations for entities that qualify for fresh-start reporting. The following sections discuss certain financial statement presentation and other reporting considerations for entities that are required to apply fresh-start reporting.

4.5.1 Financial statement presentation (bankruptcy emergence)

Fresh-start financial statements prepared by a reporting entity emerging from Chapter 11 will not be comparable with those prepared before its emergence because the financial statements are those of a new accounting entity. Thus, comparative financial statements that include a new basis of accounting and cover the period encompassing the emergence date should not be presented as financial statements covering a single period. ASC 852-10-45-26 and ASC 852-10-45-27 provide guidance on fresh-start reporting of comparative financial statements.

ASC 852-10-45-26

Fresh-start financial statements prepared by entities emerging from Chapter 11 will not be comparable with those prepared before their plans were confirmed because they are, in effect, those of a new entity. Thus, comparative financial statements that straddle a confirmation date shall not be presented.

ASC 852-10-45-27

Regulatory agencies may require the presentation of predecessor financial statements. However, such presentations shall not be viewed as a continuum because the financial statements are those of a different reporting entity and are prepared using a different basis of accounting, and, therefore, are not comparable. Attempts to disclose and explain exceptions that affect comparability would likely result in reporting that is so unwieldy it would not be useful.

For example, it would not be appropriate for a reporting entity with a December 31 year-end, for which fresh-start reporting was adopted as of April 30, to present a single income statement for the 12 months ended December 31. Rather, the reporting entity should prepare the income statement for two separate periods: (1) the pre-emergence, debtor-in-possession period of January 1 through April 30 and (2) the post-emergence period of May 1 through December 31. This would also be applicable for the statements of cash flows, of stockholders' equity, and of comprehensive income. In addition, the relevant footnote tables would be presented for the two distinct accounting periods. Typically, this would involve separate disclosures for the pre- and post-fresh-start periods for income statement items affected by the fresh-start reporting, such as depreciation and interest expense, income tax effects, and other items.
For the financial statements and footnotes, the reporting entity would generally include a vertical “black line” between the reporting for the two distinct companies to highlight to the reader that the financial statements have been prepared using two different bases of reporting. The columns related to the two accounting entities are generally labeled “Predecessor Company” and “Successor Company,” or similar designations. A discussion of the basis for presentation is also included in the footnotes to notify the reader that as a consequence of fresh-start reporting, the reporting entity’s results of operations, balance sheets, and cash flows after adopting fresh-start reporting are not comparable with those prior to the fresh-start period, and therefore have been segregated in the respective financial statements. As discussed in SEC FRM 13210.2, predecessor financial statements are required to be retrospectively adjusted to reflect the impact of a successor’s discontinued operations. We believe that other items are not required to "cross the black line." See further discussion in BLG 4.5.3.

4.5.2 Adoption of new accounting policies and pronouncements (bankruptcy emergence)

An entity adopting fresh-start reporting can generally set new accounting policies for the successor independent of those followed by the predecessor. The reporting entity emerging from bankruptcy typically is not required to demonstrate preferability for its new accounting policies, as the successor entity represents a new reporting entity for financial reporting purposes. For example, an entity adopting fresh-start reporting may elect to (1) apply the fair value option in accordance with ASC 825, Financial Instruments, or (2) switch from LIFO to FIFO to account for inventory. However, if the successor entity adopts a new policy, and results of the predecessor entity's historical operations are also included in the financial statements, clear disclosure should be made of the difference in accounting policies between the predecessor and successor entities.
When considering the adoption of new accounting policies and the potential impact future accounting standards might have on the revised policies, the reporting entity should ensure that early adoption of the future accounting standards is permitted by the standard. That is, the reporting entity should not adopt new accounting guidance prior to its permitted effective date if early adoption is not permitted by the standard. When a new accounting standard requires retrospective application, it is not necessary to adopt the standard in the predecessor entity's financial statements.

4.5.3 Discontinued operations (bankruptcy emergence)

When a successor entity has a component or group of components that is disposed of or classified as held for sale and qualifies for discontinued operations reporting, the reporting entity's financial statements should reflect the results of operations of the component in discontinued operations. Questions arise as to whether the predecessor should also present discontinued operations since that reporting entity is the "old" accounting entity that did not have a disposition. The SEC staff has expressed a view that the predecessor's financial statements should reflect the impact of a successor's discontinued operations. The staff commented that it believes this presentation enhances comparability for all fiscal periods. See FSP 27 for additional information on discontinued operations.

4.5.4 Allocation of goodwill to reporting units (bankruptcy emergence)

Adopting fresh-start reporting may result in goodwill being recorded, which represents the excess reorganization value over the identified assets recorded in accordance with ASC 805. Management will need to consider its operating structure post-emergence to determine how goodwill should be assigned to the entity's reporting units. The assignment of goodwill is necessary for impairment testing, which is required to be assessed at least annually or when an interim triggering event occurs. ASC 350-20-35-42 to ASC 350-20-35-43 describes two approaches a reporting entity might follow when assigning goodwill to reporting units: an acquisition method approach and a "with-and-without" approach. The use of either approach to assigning goodwill is dependent on facts and circumstances and should be reasonable and supportable. Refer to BCG 9 for additional information on allocating goodwill to reporting units.

4.5.5 Changes in segment reporting (bankruptcy emergence)

For public entities, the application of ASC 280, Segment Reporting, impacts both disclosures and the unit of account for goodwill impairment testing. Reporting entities emerging from bankruptcy may need to change their segments to reflect changes to the organization's structure, as well as how their chief operating decision maker (CODM) allocates resources and assesses performance post bankruptcy. Changes in operating segments may change the determination of reportable segments. See FSP 25 for additional segment reporting considerations.

4.5.6 Measurement period (bankruptcy emergence)

ASC 805 provides for a measurement period of one year after the closing date of an acquisition. We believe a measurement period generally does not exist when applying fresh-start reporting as this guidance was not incorporated into ASC 852-10. Furthermore, given the length of time that a bankrupt entity is typically in reorganization and the level of detail about the reporting entity's operations included in a reorganization plan, a measurement period to obtain facts necessary to measure identified assets or liabilities or to identify additional assets and liabilities that exist at the emergence date is generally not necessary. Therefore, adjustments to assets and liabilities subsequent to the adoption of fresh-start reporting are generally the result of post-emergence events and should be included in the results of operations in the period in which they occur. However, procedures necessary to complete the allocation of reorganization value to the reporting entity's assets (e.g., adjusting provisional plant, property, and equipment amounts to final appraised values) may be appropriate. When a reporting entity makes adjustments to the allocation of its reorganization value, it should also consider the effects of the adjustment on depreciation, amortization, or other income or expense recognized in prior periods.

4.5.7 Pro forma balance sheet presentation (bankruptcy emergence)

Entities emerging from bankruptcy subsequent to period-end will often present a pro forma balance sheet in the notes to their financial statements describing the application of fresh-start reporting on those period-end balances. This presentation is based on guidance in ASC 855, Subsequent Events, which describes presenting a pro forma balance sheet as of period-end if the subsequent event is of such significance that the disclosure can best be described by providing pro forma financial data. The emergence from bankruptcy subsequent to period-end generally is one of those types of events. This pro forma financial data typically is presented in a four-column format as shown in Example BLG 4-2 and would include applicable notations as to the basis for the adjustments presented.
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