Bankruptcy and Insolvency Accounting, Volume 2: Forms and Exhibits, 7th Edition

About the Author vii

Preface xv

Part One Bankruptcy and Insolvency Environment 1

1 Accountant’s Role in Perspective 3

1.1 Parties Served by Accountants and Financial Advisors 3

1.2 Services Often Rendered by Accountants and Financial Advisors in Business Turnarounds, Bankruptcies, and Reorganizations 4

2 Economic Causes of Business Failures 7

2.1 Illustration of Altman’s Z-Scores (REVCO) 7

Part Two Legal Aspects of Bankruptcy and Insolvency Proceedings 17

3 Turnaround Process 19

3.1 Turnaround Tool Box, Situation Analysis, First Few Weeks 19

3.2 Turnaround Tool Box, Situation Analysis Checklist 20

3.3 Turnaround Tool Box, Peer Group Analysis 38

3.4 Turnaround Tool Box, Cash Flow Analysis 43

4 Out-of-Court Settlements 49

4.1 Composition or Extension Agreement with Creditors 49

4.2 Agreement with Creditors and Debtor and Debtor’s Solicitation Letter (Disclosure Statement) 60

4.3 Settlement Agreement with Creditors—Out-of-Court 66

4.4 Restructuring Significant Amount of Debt Out of Court 79

4.5 Recapitalization of Partners Interest with Purchase of New Equity 81

4.6 Court Order Approving Blue Bird’s Prepackaged Bankruptcy 87

5 Nature of Bankruptcy and Insolvency Proceedings 97

5.1 Voluntary Petition 97

5.2 Section 503(b)(9) Motion and Order to Pay Critical Vendor Claims 117

5.3 Section 503(b)(9) Motion and Order to Pay 503(b)(9) Expenses 131

Part Three Accounting Services 143

6 Rehabilitation Proceedings under the Bankruptcy Code 145

6.1 Motion and Order Authorizing the KMIP Plan of Reorganization Metric Payment 145

6.2 Checklist for Determining the Merits of Substantive Consolidation 160

6.3 U.S. Trustee’s Opposition to Appointment of Interim CEO and Request for Trustee Appointment 163

6.4 Application for Order Approving Appointment of Trustee 171

6.5 Appointment of Examiner with Expanded Powers 178

6.6 Appointment of Examiner or Mediator in Plan Negotiations 185

6.7 Cash Collateral Order 193

6.8 Use of Cash Collateral and Debtor-in-Possession Financing for Tower Automotive 197

6.9 Priming of Prepetition, First Lien 218

6.10 Bankruptcy Court Guidelines/Orders for Motions Relating to Financing Agreements 218

6.11 Debtor-in-Possession Financing Agreement: No. 1 227

6.12 Disclosure Statement 244

6.13 Data Checklist for DIP Financing 275

6.14 Factors Determining Success of Plan 276

6.15 Plan of Reorganization 280

6.16 Disclosure Statement Review Checklist 320

6.17 Sample Disclosure Statement by Unsecured Creditors’ Committee (Selected Items) 323

6.18 Sample Disclosure Statement for Involuntary Filed Petition (Selected Data) 370

6.19 Standing Chapter 12 Trustee’s Instructions to Debtor’s Counsel 389

7 Retention of the Accountant and Fees 393

7.1 Protocol: Separating Interim Management from Financial Advisory Functions 393

7.2 Declaration of Financial Advisor in Support of Debtors’ Application to Be Retained to Provide Fresh Start Reporting and Valuation Services 396

7.3 Affidavit for Retention of Financial Advisor for Debtor 420

7.4 Affidavit of Accountant for Unsecured Creditors’ Committee 437

7.5 Affidavit of Investment Banker Filed Prior to Retention by Debtor 441

7.6 Debtors’ Application for Retention of Financial Advisor to Provide Fresh Start Reporting and Valuation Services 478

7.7 Application by Debtors for Authorization to Retain Financial Advisor 488

7.8 Application for Order Authorizing Retention of Accountants and Financial Advisors for Trustee 492

7.9 Application Retaining Financial Advisor for Unsecured Credit Committee 499

7.10 Declaration of Subsequent Connections 544

7.11 Order Authorizing Retention of Financial Advisor to Provide Fresh Start Reporting and Valuation Services to Debtors 577

7.12 Order for Retention of Financial Advisor for Debtors 580

7.13 Order Authorizing Retention of Accountants and Financial Advisors for Trustee 583

7.14 Accountant for Debtor 585

7.15 Accountant’s Affidavit Requesting Retention on a Retainer as Accountant for the Debtor 590

7.16 Procedures for Establishing Monthly Compensation and Reimbursement of Expenses of Professionals 592

7.17 Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses 596

7.18 District of Delaware Local Rule 2016-2 Motion for Compensation and Reimbursement of Expenses 602

7.19 Petition for Fee Allowance and Reimbursement of Expenses 604

8 Accounting and Financial Services for the Debtor-in-Possession or Trustee: Part I 635

8.1 Order Authorizing Use of Present Cash Management System and Bank Accounts 635

8.2 Sample Application for Order to Pay Prepetition Wages 659

8.3 Sample Application Allowing Payments to Retail Customers (Warranty Claims) 694

8.4 Sample Application for Order to Honor Accrued Vacation Days, Sick Leave, and Other Personnel Policies 696

8.5 Employee Questions and Answers 698

8.6 Schedules 701

8.7 Statement of Financial Affairs 754

8.8 Rules for Filing Operating Statements 795

8.9 U.S. Trustee Requirements 807

8.10 Compensation for Insiders 810

8.11 Operating Statements Guidelines 812

8.12 SEC Reporting 820

8.13 Pro Forma Financial Statements and Projections 826

8.14 Excerpts from Report on “Investigation of Related Party Transactions and Perquisites” 839

9 Accounting Services for the Debtor-in-Possession or Trustee: Part 2 847

9.1 Business Plan 847

9.2 Motion for Protective Order Authorizing Debtor to File Part of Business Plan Under Seal 859

9.3 Valuation and Financial Projections 866

9.4 Voting Procedures 871

10 Accounting Services for the Creditors’ Committee 881

10.1 Sample Report to Creditors’ Committee 881

11 Valuation of a Business in Bankruptcy Proceedings 889

11.1 Selection of Interest Rate for Valuation? 889

11.2 Liquidation Value Under Chapter 7 903

11.3 Example of Reorganization Value Determined by Discounted Cash Flows 919

11.4 Determination of Value in Chapter 11 Case 925

11.5 Present Fair Salable Value, Liquidation in Place, and Orderly Liquidation 968

Part Four Auditing Procedures and Reports 975

12 Audit Procedures and Special Areas of Inquiry 977

12.1 Report on Special Investigation 977

12.2 Audit Program Guide 983

13 Financial Reporting During Bankruptcy 1003

13.1 First Financial Statements Issued During Chapter 11: Buffets 1003

13.2 Financial Statements Issued During Chapter 11: Dura Automotive 1011

13.3 Liabilities Subject to Compromise 1033

14 Reporting Results of the Plan 1037

14.1 Fresh-Start Reporting: Sunbeam-Oster 1037

14.2 Financial Statements Based on SOP 90-7 1044

14.3 Pro Forma Balance Sheet of USG Corporation 1071

15 Reporting on an Insolvent Company 1083

15.1 Example of Unqualified Opinion Containing Uncertainty About Going Concern 1083

15.2 Example of Unqualified Opinion Explaining the Ability to Continue as a Going Concern 1084

15.3 Sample of a Qualified Opinion with “Except for” Wording for Departure from GAAP 1088

15.4 Sample of a Disclaimer of Opinion Issued to Creditors’ Committees and in Chapter 11 Reorganizations 1089

15.5 Example of Adverse Opinion for Material Departures from GAAP 1097

15.6 Report in Connection with Claims of Creditors 1098

15.7 Report for Agreed-on Procedures Relating to Leveraged Buyout Transactions 1099

15.8 Examination Report for Projected Financial Statements 1102

15.9 Compilation Report for Projected Financial Statements 1103

15.10 Disclaimer of Opinion on Projected Financial Statements 1104

Part Five Taxes 1107

16 Tax Awareness 1109

16.1 IRS Form 1041 1109

16.2 IRS Form 982 1109

16.3 Impact of Taxes on Potential Plan of Liquidation in Chapter 11 Proceeding 1109

16.4 Tax Impact of Plan of Chapter 11 Corporate Reorganization 1121