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the debtor has determined an estimate of the value of the entity that will emerge from bankruptcy, the accountant can provide assistance to the debtor in negotiating the terms of the plan with the creditor (iv) Pro Forma Balance Sheet Also of considerable help in evaluating a plan is a pro forma balance sheet showing how the balance sheet will look if the plan is accepted and all provisions of the plan are carried out By using reorganization models or simulation models, the pro forma balance sheet may be prepared based on several possible courses of action that the debtor could take The pro forma balance sheet illustrates the type of debt equity position that would exist under different alternatives This pro forma balance sheet should re ect the debts at discounted values Assets are generally presented at their historical cost values unless the debtor has made a decision to apply the concept of quasi reorganization A pro forma balance sheet that re ects the reorganized values of the entity is of considerable bene t to the debtor in developing the terms for a plan Once the terms of the proposed plan have been nalized, the pro forma balance sheet based on historical values re ecting these terms is generally included in the disclosure statement that must be submitted prior to or at the time votes are solicited on the plan The pro forma balance sheet re ecting reorganized values, however, provides information for the creditors and stockholders that is much more relevant in making an informed judgment about how to vote on the plan (v) Reorganization Model Accountants can develop a model to help the debtor in developing a plan The outcome of a reorganization plan depends on a variety of assumptions, including the creditors willingness to accept different mixes of cash and securities, economic trends, possible sources for nancing continuing operations or acquisitions, and many other factors Using a model, these assumptions can be altered one at a time with all else held constant, and the possible courses of action can be analyzed according to the needs of management Using this technique, creditors or the debtor can identify potential problem areas and request clari cations Once these have been received and entered into the system, a new set of comparisons is made and the process is repeated until both sides are satis ed that the most favorable course is being pursued Breakdowns of reorganization plans by computer models allow debtors and creditors to focus on the nancial data most relevant to the case at hand (g) ACCOUNTING SERVICES ASSISTANCE TO CREDITORS COMMITTEE The following subsections describe several of the services that the accountant can render for the creditors committee or for a committee of equity holders (i) Assistance in the Bargaining Process One of the basic functions performed by the creditors committee is to negotiate a settlement and then make its recommendation to the other creditors The accountant should be familiar with the bargaining process that goes on between the debtor and the creditors committee in trying to reach a settlement Bargaining can be both vigorous and delicate The debtor bargains, perhaps, for a settlement that consists of a small percentage of the debt, demanding only a small immediate cash outlay, with payments to be made in the future The debtor may want the debts outstanding to be subordinated to new credit or may ask that the agreement call for partial payment in preferred stock The creditors want a settlement that represents a high percentage of the debt and consists of a larger cash down payment with the balance to be paid as soon as possible In cases where there is very little cash available for debt repayment on con rmation, unsecured creditors may be interested in obtaining most of the outstanding stock of the company In the past 10 years, the creditors of public companies have received an increasing interest in the ownership of the debtor It is not unusual for the creditors to own between 80 percent and 95 percent of the outstanding stock of the emerging entity For example, Wickes creditors received 84 percent ownership, and the existing equity of Emmons Industries retained only 3 percent interest whereas creditors received the balance The shareholders of failed LBOs often receive no equity interest in the reorganized entity
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