IT2013_1069_CH13_v2_P1_7-22

Chapter 13:
Certain Quasi Reorganizations

Chapter Summary

A quasi reorganization is a voluntary accounting procedure by which an entity with an accumulated retained earnings deficit adjusts its accounts to obtain a “fresh start.” A quasi reorganization may somewhat resemble a legally executed reorganization, but the procedure is accomplished without formal court proceedings and does not contemplate the creation of a new corporation, a change in corporate ownership, or a change in the rights and interests of creditors or owners. The procedure does, however, normally require the approval of either the board of directors or shareholders, depending on the laws of the state of incorporation.


13.1 General

ASC 852-20 discusses the accounting to be applied in a quasi reorganization. Additional information on quasi reorganizations, including related accounting guidance, is available in the PricewaterhouseCoopers Accounting and Reporting Manual, Section 5590.2, Quasi Reorganizations.

13.2 Pre-reorganization Tax Benefits

Under ASC 852-740-45-3, the tax benefits of deductible temporary differences and carryforwards that existed at the date of a quasi reorganization must be credited directly to contributed capital when they are recognized subsequent to the quasi reorganization. Under ASC 740-10-25-5, companies are required to recognize all deferred tax assets that meet the more-likely-than-not recognition criterion. Therefore, benefits may be recorded before they are realized on a tax return. This generally will result in an entity recording a deferred tax asset for the tax benefits of deductible temporary differences and carryforwards existing at the date of the quasi reorganization. We believe that in most instances where deferred tax assets are recorded, a valuation allowance will be necessary.

Although there is no positive impact on the income statement for post-quasi reorganization recognition of pre-quasi reorganization tax benefits, there is a potentially negative impact. Any increase in the valuation allowance subsequent to the date of the quasi reorganization must be recognized in the period in which it occurs, with the effect allocated to the income tax provision for continuing operations.