QUASI – REORGANIZATION

Quasi- Reorganization
1. Elimination of a deficit ( debit balance in the retained earnings account) through a
restatement of invested capital.
2. Does not require recourse to the courts as in a bankruptcy.
3. No change in legal corporate entity.
4. No interruption of business activity.
5. Fresh start for the company with a zero retained earnings balance.
6. Also known as corporate readjustment.
7. Must be approved by SEC.

Circumstances that may justify quasi-reorganization :

1. When a large deficit exists.
2. When approved by the shareholders and creditors.
3. When the cost basis for property, plant and equipment becomes unrealistic and their
current value is substantially more than their cost.

Quasi- reorganization may be accomplished through:

1. Recapitalization
2. Revaluation of property, plant and equipment (appraisal to be done by an independent
expert or specialist).

SEC Requirements:
1. Increase in the value of property, plant and equipment is credited to revaluation reserve in
property.
2. The adjustments concerning other assets should be made through retained earnings.
3. The resulting deficit from the reorganization is offset against the revaluation reserve.
4. Retained earnings subsequent to the quasi-reorganization shall be restricted to the extent
of the deficit wiped out during the reorganization and therefore cannot be declared as
dividend.
5. Losses subsequent to quasi-reorganization cannot be charged to the remaining
revaluation reserve.
6. The quasi-reorganization should be disclosed for at least 3 years.

1
Pro-forma Entries

Recapitalization
Write-down of assets Retained earnings xxx
Asset account xxx

Write-down of liabilities Liability account xxx

Retained earnings xxx

Restatement of share Share capital (old) xxx

capital Share capital (new) xxx
Share premium - recapitalization xxx

Elimination of deficit Share premium - recapitalization xxx

Retained earnings xxx

Revaluation
Revaluation of assets Property asset xxx
Accumulated depreciation xxx
Revaluation surplus xxx

Write-down of other Retained earnings xxx

Assets Asset account xxx

Write-down of liabilities Liability account xxx

Retained earnings xxx

Elimination of deficit Revaluation surplus xxx

Retained earnings xxx

March 2020