Fresh-start financial statements prepared by a reporting entity emerging from Chapter 11 will not be comparable with those prepared before its plans were confirmed because the 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 confirmation 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.
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.
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 statement of operations for the 12 months ended December 31. Rather, the reporting entity should prepare the statement of operations 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 statement of operations 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."