What is Quasi-Reorganization?
Company records are changed to remove the deficit of the retained earnings and restating the balance sheet by showing bankruptcy. Although bankruptcy is not filed, shareholders have to agree to the changes. These are controversial policies because they do not change the financial position of the company, instead it just plainly makes the balance sheet looks prettier and healthier. This accounting policy is seldom done. This is just a tool in the accounting industry to restructure corporate. To effect reorganization, here are some of the procedures that could be followed:
- Assets and liabilities of the firm are reassessed and revalued so that a fair value is found in the books in relation to the credit and debits of the earnings retained. The deficit is increased through this.
- Retained earnings deficit balance is removed or eliminated against the add-in capital. If that does not cover the whole deficit, then a stock reduction is required.
- The dating of the retained earnings is shown to make it more transparent in accordance as to when the deficit was removed and when the new accumulation of funds began.
Example of a Quasi- Reorganization
The deficit is increased when the fair values are shown through revaluation if assets. The deficit $550 ($300 + 75 + 175), can partially be absorbed through a balance of paid-in capital in addition.
The remaining deficit of $400 ($300 + 75 + 175 − 150), has to be absorbed through reduction of balance in common stock.
In order to eliminate or remove deficit of retained earnings and evaluate the assets and liability values, the companies adopt the policy of Quasi-Reorganization. Elimination of debt through this process and creating a fresh start is common among many organizations that have failed to keep up. Most of the companies or firms adopting the policy are manufacturing, oil and natural gas companies. The three major advantages of this policy are that the firm cam pays in dividends through the future income streams and reduce the deficit balance in retained earnings. Second is that it affects income-tax expenses as most of the gains are because of revaluation of the assets and liabilities that is sent to paid-in capital. Lastly, the cost of reorganizing may cost a fortune.