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One Man’s Junk…

Accounting for purchase of receivables from a company undergoing Chapter 11.

Q: We are contemplating the purchase of equipment and receivables from a creditor group under a Chapter 11 bankruptcy in the state of Tennessee. Our Texas based C corporation would borrow some funds and use equity for the balance to purchase assets for approximately $3 million dollars.

I have several questions:

  1. How do I record the equipment assets? I have appraisals on equipment for orderly liquidation value and for auction value.
  2. How do I establish appropriate depreciation schedules for these assets? We would purchase some Accounts Receivable and collection would be ours.
  3. In addition, we would also receive a second set of accounts receivable that are delinquent. We would retain 50 percent of what we collect and would remit the remaining 50 percent to the banks if and only if collected. Do I assign any value to these receivables? If so, do I also establish a reserve for potential losses? How would I recognize income from collections?


B.B.
Dallas

A: To answer your questions, look to Opinion 16 by the Accounting Principles Board, the precursor to the Financial Accounting Standards Board.

  1. APB 16 would guide you to allocate the consideration paid (i.e. the borrowed funds and cash payment) for the purchased assets at fair market value. Normally, the fair market value is neither the liquidation value or the auction value but is based upon an in-place and in-use appraisal valuation. You should allocate the consideration to the most liquid assets first, in your case receivables and then to the fixed assets, not exceeding the total consideration. Any consideration, including the direct costs of the acquisition, in excess of the fair market value of the assets acquired will be allocated to goodwill.
  2. Depreciation should be based upon the useful lives of the respective fixed assets, based upon the fair market value assigned to them through the APB 16 allocation summarized above.
  3. Finally, APB 16 would direct you to allocate the consideration to the fair market value of the delinquent receivables as well (you may determine that this would be less than face value based upon your expectation of the collection amount and include a provision for the time value of the money for the holding period longer than normal business practices). Fifty percent of this valuation should be recorded as a liability due to the financial institution. The collection of the receivables would not result in the recognition of income. The liability for the amount due will increase the amount of the consideration paid for all of the assets.

Charles Allen, Partner
Crowe Chizek & Co. LLP

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