When judicial authorities seek evidence that a company's turnaround is complete and want to give the business a second chance, they look for a few clues -- namely management competence, strategic vision, a new business plan and vendor support. Fresh-start accounting is right there in the mix, allowing the newly formed organization to correctly capture economic events and nurture its way back into financial soundness.
Fresh-start accounting gives a breath of bookkeeping fresh air to a company that has emerged from bankruptcy or is successfully coping with the remnants of a liquidation process. This type of record-keeping enables the business to adjust its assets to the current value at the time of reorganization, reporting its liabilities based on the present value of future settlement amounts. To use fresh-start accounting, a company must meet two criteria at the time of reorganization: Its initial owners possess less than 50 percent of the corporate voting stock, and the fair value of the company's assets is less than its aggregate operational liabilities. These include money that the organization owed prior to bankruptcy and debt it incurred during the reorganization process.
Regulatory pronouncements about fresh-start accounting -- and all reorganization-related financial reporting practices, for that matter -- generally reach a vast audience. Besides companies involved in bankruptcy or near-liquidation proceedings, attorneys and business strategists heed what Congress does with respect to post-bankruptcy accounting. Academic scholarship also devotes much ink to the subject of fresh-start accounting, especially university lecturers and members of think tanks who closely follow economic trends and the number of companies that go out of business. To comply with fresh-start accounting, a company first must agree to follow all record-keeping rules the Financial Accounting Standards Board establishes. FASB rules are also known as generally accepted accounting principles.
Averting Early Capitulation
By allowing a company to start anew in terms of bookkeeping and financial reporting, government officials help top leadership prevent an early capitulation. This often happens when senior executives, feeling the burden of a previously contracted debt pile, cannot implement proper strategies to bring the business back on track and help it make money. For example, if a company uses post-bankruptcy accounting to report debts amounting to $1 million instead of $10 million, it's more likely to attract the attention of lenders who fret about credit risk. In essence, fresh-start accounting relieves the organization of a prior financial load -- such as a loan or other contractual commitment -- by reducing the obligation amount significantly.
Employees who help a business implement and track fresh-start accounting processes include financial managers, accountants and bookkeepers. Other personnel who contribute their intellectual wealth include corporate treasurers, tax managers and budget supervisors.
- "Journal of Accounting, Auditing and Finance"; The Association between Firms' Values and Accounting Numbers after Adoption of Fresh Start Reporting; Reuven Lehavy
- "Review of Accounting Studies"; Reporting Discretion and the Choice of Fresh Start Values in Companies Emerging from Chapter 11 Bankruptcy; Reuven Lehavy; 2002
- "Advanced Accounting, 9/e"; Joe Ben Hoyle, et al.; 2002
- "Advanced Accounting, 6th Edition"; Joe Ben Hoyle, et al.; 2006