 Hello and welcome to this session. This is Professor Farhad and this session we're going to be looking at something called fresh start Fresh start occur post after chapter 11 bankruptcy. Remember chapter 11 bankruptcy is a form of free organization This topic is covered in advanced accounting. It's also covered on the CPA exam far not regulation I don't believe this cover only this is covered on the regulation section Please connect with me on LinkedIn if you have a LinkedIn account, please connect with me You want to make sure you subscribe to my YouTube? I have 1500 plus Accounting auditing and tax lectures. They're all free. You can view them on YouTube Please like them if you like them share them put them in playlists Let the world know about them if you're benefiting from my YouTube It means someone else might benefit as well. This is my Instagram account. This is my Facebook account and I do have a website on my website I often have CPA deals for you for now becker the gold standard and CPA review courses is offering a thousand dollar off Under unlimited access option this this offer doesn't come very often So if you're studying for your CPA exam or if you are taking accounting courses It's no harm to sign for it now Why because you're gonna supplement your college education with the gold standard of CPA preparation and notice this has unlimited access So today we're gonna be talking about the fresh start. So the remember The company has the option of filing chapter 7 which is liquidation go going out of business or chapter 11 chapter 11 We looked at it in the prior session chapter 11 is a form of reorganization So the first step after filing chapter 11 is the company must reorganize now Fingers crossed. Hopefully after we reorganize The firm might qualify for a fresh start accounting also referred to as the confirmation of the plan re-organization So basically what happened is if they got out of the bankruptcy They will have the company will provide a fresh presentation of a newly valued asset and adjusted Liabilities, what is fresh as the word suggests fresh means it's new everything is new their assets are new assets or liabilities Simply what they do, they will clean up their old balance sheet. They'll clean up the balance sheet eliminate any accumulated losses and improve the chances of survival as the new company coming out of bankruptcy for example and And when GM get out of bankruptcy, they made sure they got out of the union contract between them and the union that helped them tremendously among many other things among restructuring during that So assets and liabilities once the company emerged freshly assets and liabilities are reported at fair value And we will eliminate beginning retained earning is reported as zero. What does that mean? It means any retained earning. That's that's whether it's deficit It's negative or surplus positive is eliminated So when we have a fresh start retained earnings start at zero When are we allowed to have fresh start two conditions must exist one is The fair value of the asset they must be less than the post petition liabilities and allowed claim now What is post petition? It's when the petition for the for the bankruptcy occur So they have to be less than the post petition liabilities and allowed claim That's one condition and the original owner must receive less than 50% of the voting stock after the reorganization So the original the prior sorry The prior the prior owners can only own less than 50% Now any effect on the forgiveness of the debt because when you forgive of the debt there is an accounting effect That is reflected in the predecessor entity final statement So any forgiveness of that that's in the prior financial statements The fresh start don't show any effect of the forgiveness of the debt We also have to add additional notes to the financial statements Such as adjustment to the historical amount of individual assets and liabilities How did we come up with those adjustments the amount of debt forgiveness now notice? This is only notes not the numbers in the financial statements only the notes only in the notes Significant matter relating to the termination of the revaluation value Including the following so we have to be to tell the users How did we came up with this with this fresh start computation one We have to look at the method or method used to determine to determine the reorganization value And we have to take into account factors as the discount rate Tax rate number of years in which cash flow are projected in the matter of determining terminal value So how did we come up with all these numbers? Sensitive assumptions that is assumptions about which there is a reasonable possibility of the occurrence of a variation That would have significantly effect measurement of the reorganization What assumptions did we make and did we make old source of assumptions? What if this happened? What if that happened sensitive assumption? What if basically? Assumptions about anticipated condition that are expected to be different from the current condition unless otherwise apparent Also, we have to disclose assumptions that could be different from what we are Experiencing now as long as they are not obviously apparent So those are the notes for the financial statements and the financial statements start with zero retained earning Assets and liabilities reported at fair value now a case in point is GM GM went through chapter 11 And they got out of chapter 11 and they had a fresh start So after they got get out of chapter 11, they reduced our liabilities by 93 billion They increased our asset by 34 point six billion And what was unusual about GM is the creation of a goodwill of 30 point two billion Most of this goodwill was the result of accounting rules Okay, so what happened is in valuing liabilities the firm credit word in this must be considered What does that mean? Since the credit word in it of GM was problematic What does he mean problematic? It means they did not have good credit Once you don't have good credit when you discount your loan you discount your loan at a higher rate Okay, so rather than discounting your loan at 10% because you have a bad credit They will discount your loan at 13% what happened with a higher discount rate with the higher discount rate It gives you lower that Book value or lower liability well lower liability means you have less that Which in turn gives you other asset which happened to be booked into goodwill and Also lower tax asset carrying value which in turn contributed to a higher Goodwill so notice GM was able to report 30 billion of goodwill because of different accounting rules as they were coming out of bankruptcy out of chapter 11 and as a result they increased their asset by 34 billion most of it was has to do with accounting rules with Either valuing the debt or value lower tax asset carrying value If you have any questions any comments about this fresh start accounting Please let me know in the next session. I would look at that restructuring But if you happen to visit my website for additional lectures, please consider donating if you're studying hard for your exam Study hard. It's worth it and see you on the other side of success