Fair Value & Bankruptcy: Fresh-Start Accounting

Perhaps because most CFOs would rather not need to be familiar with the special accounting rules that apply in the event of bankruptcy, the standards regarding so-called “fresh-start” accounting receive relatively little attention. A recent article on CFO.com provides a good overview of fresh-start accounting.

For management teams working through a bankruptcy, there are a number of valuation-related considerations. In our experience, two principal valuation-related questions are relevant for companies in bankruptcy:

1. Reorganization Value. As noted in ASC 852, Reorganizations, reorganization value “generally approximates the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the restructuring.” (ASC 852-05-10) Discounted cash flow analysis is the principal technique for measuring reorganization value. In certain cases, depending on the nature of the business and availability of relevant guideline companies, a method under the market approach may also be appropriate. A robust cash flow forecast and reliable estimate of the appropriate cost of capital are essential inputs to measuring reorganization value.
2. Identifiable Intangible Assets. When fresh-start accounting is required, it may be appropriate to allocate a portion of the reorganization value to specific identifiable intangible assets such as tradename, technology, or customer relationships. Fair value measurement of these assets typically requires use of the multi-period excess earnings method or other techniques often used in purchase price allocations following a business combination.

We have assisted with numerous clients in developing and defending both reorganization values and identifiable intangible assets in the context of corporate bankruptcy. Give one of our professionals a call today to discuss your needs in confidence – we are here to help.