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Section 1625 - Comprehensive Revaluation of Assets and Liabilities

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Updated: December 2014

Effective Date: Fiscal years beginning on or after January 1, 20111

  • A substantial realignment of the equity and non-equity interests of a enterprise such that the holders of one or more of the significant classes of non-equity interests and the holders of all of the significant classes of equity interests give up some (or all) of their rights and claims upon the enterprise.
  • The holders of one or more of the significant classes of non-equity interests and the holders of all of the significant classes of equity interests must participate in the process if the reorganization is to be viewed as justifying a "fresh start".
  • The process must result in a substantial realignment such that the rights and claims of the equity and non-equity interests change relative to each other.

  • A technique that attributes revised values to the assets and liabilities reported in the financial statements of an enterprise based on a purchase transaction or transactions of its equity interests.
  • Application of the technique results in the acquirer's cost being assigned to the assets and liabilities of the acquired enterprise.

The following conditions are required to be satisfied for a enterprise’s assets and liabilities to be comprehensively revalued:

  • all or virtually all (at least 90%) of the equity interests in the enterprise have been acquired, in one or more transactions between non-related parties, by an acquirer who controls the enterprise after the transaction or transactions; or
  • the enterprise has been subject to a financial reorganization, and the same party does not control the enterprise both before and after the reorganization;
and in either situation new costs are reasonably determinable.
 

Acquisition of an Enterprise – Push-down Accounting

  • The values used in push-down accounting are those resulting from accounting for the purchase transaction or transactions in accordance with Section 1582, Business Combinations.
  • The portion of retained earnings that has not been included in the consolidated retained earnings of the acquirer or is not related to any continuing non-controlling interests in the enterprise is reclassified to either share capital, contributed rplus, or a separately identified account within shareholders' equity.
  • The revaluation adjustment is accounted for as a capital transaction (see Section 3610, Capital Transactions), and recorded as either share capital, contributed surplus, or a separately identified account within shareholders' equity.

Financial Reorganization

  • The new costs reflect the values established in the negotiation of claims among non-equity and equity interests and do not exceed the fair value of the enterprise as a whole, if known.
  • If the financial reorganization does not establish values for identifiable individual assets and liabilities, values are estimated on a basis consistent with Section 1582.
  • When the revalued net asset value exceeds the fair value of the enterprise as a whole, the new costs allocated to identifiable non-monetary assets are reduced by the amount of the excess based on their relative fair values at the date of the financial reorganization.
  • When the fair value of the enterprise as a whole exceeds the revalued net asset value, the difference (goodwill) is not recorded.
  • Retained earnings that arose prior to the reorganization are reclassified to share capital, contributed surplus, or a separately identified account within shareholders' equity.
  • The revaluation adjustment is accounted for as a capital transaction (see Section 3610, Capital Transactions) and recorded as share capital, contributed surplus, or a separately identified account within shareholders' equity.
  • Expenses directly incurred in effecting a financial reorganization shall be accounted for as a capital transaction (see Section 3610).
  • Write-downs related to circumstances that existed prior to the financial reorganization are accounted for in the income statement for the period prior to the financial reorganization and the adoption of a "fresh start" basis of accounting.
  • When there is a negative balance in shareholders' equity after the comprehensive revaluation, share capital is disclosed at a nominal value and the balance is disclosed as a capital deficiency resulting from the financial reorganization.

Income Tax Benefits

  • When the future income taxes method is used, a future income tax asset that arose prior to the date of a comprehensive revaluation and that was not recognized in the comprehensive revaluation is subsequently recognized, the benefit shall be recognized:
    • In net income if the comprehensive revaluation related to push-down accounting; or
    • In accordance with paragraph 50 of Section 3465, Income Taxes, if the comprehensive revaluation was due to a financial reorganization.
  • Under the future income taxes method, future income tax assets are appropriately recognized as part of a comprehensive revaluation to the extent that they are more likely than not to be realized (see Section 3465).
  • Future income tax assets that are not considered to be more likely than not to be realized at the time of the comprehensive revaluation would be excluded from the revaluation.
  • If such an unrecognized future income tax asset were recognized subsequent to:
    • The application of push-down accounting, the benefit would be recognized in net income or, if Section 3465 so requires, outside net income; or
    • A comprehensive revaluation resulting from a financial reorganization, the benefit would be recognized in a manner consistent with the revaluation adjustment recorded at the time of the financial reorganization.

  • Generally, prior period figures are not included in the financial statements of an enterprise that has comprehensively revalued its assets and liabilities as a result of a financial reorganization.
  • When figures prior to the comprehensive revaluation are provided, for statutory or other purposes, financial information for the periods before and after the reorganization would be segregated on a columnar basis.

1 Except as specified in paragraph 1625.50.

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