CPAs In Industry Newsletter

June 2008
A Service of the NYSSCPA
Vol. 2, No. 2

FASB PROJECT: Final FSP SOP 90-7-1, “An Amendment of AICPA Statement of Position 90-7”

By William R. Lalli, CPA, NYSSCPA Tax Policy Manager

In a recently released FASB Financial Staff Position (FSP), the FASB resolved the conflict between guidance that requires early adoption of new accounting standards for entities required to follow “fresh-start” reporting under AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and other authoritative literature prohibiting early adoption.

Changes at a Glance

1. The guidance in the FASB’s FSP applies to an entity that is required to apply fresh-start reporting under SOP 90-7.
2. The FSP amends SOP 90-7 to nullify the requirement in paragraph .38 of SOP 90-7 regarding changes in accounting principles.
3. Effective Date and Transition: The FSP is effective for financial statements issued subsequent to the date of issuance of this FSP.

The brunt of the changes in this FSP pertains to the issue of early adoption and changes to comport with existing standards. According to the FASB, at issue was:

  • Whether an emerging entity that is applying fresh-start reporting should follow the provisions of SOP 90-7 in the early adopting of new accounting standards that will be effective within 12 months from the adoption of fresh-start reporting or
  • Whether the emerging entity should follow the effective date guidance of a new accounting standard when the new accounting standard prohibits early adoption.

The concept of fresh start accounting refers to the rules that allow companies to present their assets, liabilities, and equity as a "new entity" on the day the company emerges from chapter 11 bankruptcy protection. Unfortunately, this topic has become more relevant as several large companies have recently emerged from bankruptcy. They now must issue financial statements in accordance with Generally Accepted Accounting Principles (GAAP) who have adopted fresh start accounting.

As one might expect with such a significant change, there are attendant benefits and risks. According to the FASB, these are the attributes that apply after language referring to the implementation has been amended:

  • The reorganization value of the entity should be allocated to the entity's assets in conformity with the procedures specified by FASB Statement No. 141, Business Combinations.
  • Each liability existing at the plan confirmation date, other than deferred taxes, should be stated at present values of amounts to be paid determined at appropriate current interest rates.
  • Deferred taxes should be reported in conformity with GAAP. Benefits realized from pre-confirmation net operating loss carryforwards should first reduce reorganization value in excess of amounts allocable to identifiable assets and other intangibles until exhausted and, thereafter, be reported as a direct addition to paid-in capital.
  • The reorganization value of the entity should be assigned to the entity's assets and liabilities in conformity with the procedures specified by FASB Statement No. 141 (revised 2007), Business Combinations.
  • If any portion of the reorganization value cannot be attributed to specific tangible or identified intangible assets of the emerging entity, such amounts should be reported as goodwill in accordance with paragraph 6 of FASB Statement No. 142, Goodwill and Other Intangible Assets.
  • Deferred taxes should be reported in conformity with GAAP. If not recognizable at the plan confirmation date, initial recognition (that is, by elimination of the valuation allowance) of tax benefits realized from pre-confirmation net operating loss carryforwards and deductible temporary differences should be reported as a reduction to income tax expense.

The language that was deleted in the AICPA Statement of Position 90-7 was intended to allow the current and existing standards to comport. The strikethrough indicated the deletion.

The FASB made the following changes to the AICPA’s Statement of Position 90-7 (strikethrough indicates deletion of text):

Amendment to SOP 90-7

  • Changes in accounting principles that will be required in the financial statements of the emerging entity within the twelve months following the adoption of fresh-start reporting should be adopted at the time fresh-start reporting is adopted.

Paragraph .38, as amended by paragraph F23 of Statement 141(R):

Entities that adopt fresh-start reporting in conformity with paragraph .36 should apply the following principles:

  • Changes in accounting principles that will be required in the financial statements of the emerging entity within the twelve months following the adoption of fresh-start reporting should be adopted at the time fresh-start reporting is adopted. ”

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