What is a quasi-reorganization’
Quasi-reorganization is a relatively little-known provision in accordance with US GAAP which provides that under certain circumstances, a firm may eliminate a deficit in retained earnings by conversion of the assets, liabilities and capital on the analogy of bankruptcy. The shareholders of the company must agree to change accounting, which essentially resets all of the books of the company as if the new company carried assets and liabilities of the old firm.
The destruction of the quasi-reorganization’
Although the idea of quasi-reorganization has seen some renewed interest, the provision is still rarely applied in practice. The idea of quasi-reorganization-catching for some, the idea of “new start” and is more interesting for investors than slowly digging out from a big deficit in retained earnings. Some also argue that a quasi-reorganization can be an effective method to improve the accuracy of resetting balance sheets firm when a serious fall in the value of assets is not properly reflected. However, quasi-reorganization remains highly controversial, as it does not really change the economic reality, but rather a way to make the book more favorable.
Many new businesses operate at a loss for several years after the creation. During this period, the sales team makes contact, workers are trained, processes are improved and streamlined, and brand recognition cultivated. By the time the company to return to profit, a significant retained deficit of income can be developed. In addition, a prolonged recession could turn a profitable company into a company with a retained deficit of income.
Often illegal or prohibited on debt to pay dividends from retained earnings when working with there is a deficit of income. In this case, the cost of equity may increase substantially as investors demand more yield for the perceived risk. Here, a quasi-reorganization can make from a financial point of view.
The purpose of quasi-reorganization
The main purpose of quasi-reorganization should bring retained income balance to zero. First, overvalued assets must be recorded at fair value with a direct reduction of retained earnings. Although this increases the short-term deficit, it will reduce future depreciation expense. Liabilities are also restated to reflect their fair value with any offset occurring on the continued deficit of revenue.
As soon as the assets was reduced to fair value, or additional paid-in capital or nominal value of ordinary shares reduced to eliminate retained deficit of income. Companies have some flexibility in deciding how to deal with quasi-reorganization – it is possible to reduce the nominal value, the increase in additional paid-in capital and retained earnings reset at the same time.