A reorganization proceeding does not ordinarily affect or change the application of GAAP. However, as noted in ASC 852-10-45-1, “the needs of financial statement users change, and thus changes in the reporting practices previously followed by the entity are necessary.” As such, in the period between the filing of the bankruptcy petition and emergence, ASC 852-10-45 and ASC 852-10-50 require the following incremental disclosures for entities in bankruptcy:
  • The status of the plan of reorganization and voting by the creditors
  • The effects of the application of ASC 852 on the financial statements of the reporting entity as the debtor-in-possession

    • Balance sheet

      The basis for determining which claims are included within liabilities subject to compromise and the significant categories of the claims should be disclosed in the footnotes. Claims that are not subject to reasonable estimation under ASC 450-20, Contingencies, should also be disclosed.

      If the reporting entity has not finished its assessment of valid claims, it should clearly disclose that fact as well as the number of claims that have not yet been assessed. Additionally, companies in bankruptcy often receive claims from creditors that are not valid. In that case, the amount of the total claims submitted, the process for considering those claims, and the amount of those claims that are expected to be rejected should also be disclosed.

      See additional discussion of the presentation of liabilities under ASC 852-10 in BLG 3.3 as well as considerations related to prepetition debt and related debt issuance costs during bankruptcy in BLG 3.5.
    • Income statement

      The reporting entity should disclose the basis for determining which items are included within reorganization items and the significant categories of such items, including revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization, except for those required to be reported as discontinued operations under ASC 205-20

      Interest income earned by a reporting entity in bankruptcy that would not have been earned except for the bankruptcy proceedings is required to be included within reorganization items.

      The difference between reported interest expense and the amount that would have been accrued absent the limitations for accruing interest under bankruptcy law may be included on the face of the income statement or in the footnotes.

      See additional discussion of applying ASC 852-10 to the income statement in BLG 3.10.
    • Statement of cash flows

      If the statement of cash flows is prepared using the indirect method, the details of operating cash receipts and payments resulting from the reorganization may be included in the footnotes or disclosed in a supplementary schedule.

      See additional discussion of applying ASC 852-10 to the statement of cash flows in BLG 3.11.
    • Condensed combined financial statements

      The consolidated financial statements that include one or more entities in bankruptcy and one or more entities not in bankruptcy should include the condensed combined financial statements of the entities involved in the reorganization proceedings.

      The condensed combined financial statements are comprised of (1) the balance sheet as of the date of the consolidated balance sheet and (2) the income statement and statement of cash flows for the period in bankruptcy. The condensed combined financial statements should be prepared on the same basis as the consolidated financial statements.

      A reporting entity should also disclose intra-entity receivables and payables of entities involved in the bankruptcy proceedings.
    • Earnings per share

      Earnings per share should be reported, if required, in conformity with ASC 260, Earnings Per Share. If it is probable that the reorganization plan will call for the issuance of common stock or common stock equivalents, thereby diluting current equity interests, that fact should also be disclosed.
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