Memorandum
To: Parent Co. Accounting Files
From: Accounting Policy team
Date: 11 February 2020
Re: Accounting for the Acquisition of a Legal Subsidiary in Bankruptcy
Facts/Background
Parent Co. (Parent) is a nonpublic company that fully owns two subsidiaries, Poor Son Co. (Poor
Son) and Rich Grandson Co. (Rich Grandson). Poor Son is a nonpublic company that originally
owned Rich Grandson, a public company registered with the Securities and Exchange
Commission. In 2012, Rich Grandson was transferred to Parent Co. to serve as its subsidiary. In
January 2013, Poor Son filed for Chapter 11 as a voluntary petition for reorganization. Parent
was unable to have stable control over Poor Son due to the bankruptcy which resulted in the
deconsolidation of Poor Son from its financial statements. Parent’s reasoning to support the loss
of control of Poor Son was due to 1. Parent loss of ability to remove and replace three out of the
five Poor Son’s board of directors, 2. Poor Son’s action lawsuit against Parent in 2014 in order to
claim the transfer of Rich Grandson was fraudulent and to return all interest and dividends
received from after Rich Grandson’s transfer, 3. Poor Son’s termination of all of Parent’s
employees that were involved in the management and technical assistance at its company.
In May 2015, the bankruptcy court held a selection meeting for the bidding for Poor Son’s
reorganization. By June 2015, OtherCo. won the bidding war and became plan sponsor. The
value of the join plan of reorganization was approximately $1 billion, however, in the following
months, Poor Son’s value declined significantly due to external economic conditions which led
to the OtherCo. to revoke its initial offer.
In December 2015, Parent Co. became the new winning plan sponsor. Parent’s plan resulted in
100 percent of new equity interests in “Reorganized Poor Son” and to have full voting rights on
Poor Son’s new five board of directors. By February 2016, Parent gained full authorization for
Poor Son’s plan.
The following illustration demonstrates the relationship between Parent Co., Poor Son Co., and
Rich Grandson Co.
Parent Co.
Poor
Son Co.
Rich
Grandson Co.
Legal
Subsidiary
100%
Equity
Legal
Subsidiary
Parent Co. must now determine whether the acquisition of the legal subsidiary, Poor Son,
qualifies under a business combination. Poor Son must determine whether the voluntary petition
to file for bankruptcy under Chapter 11 qualifies for fresh start reporting and push down
accounting.
Issues
1. Does Parent’s purchase of a legal subsidiary in bankruptcy qualify as a business
combination under ASC 805?
2. If Parent’s purchase of a legal subsidiary in bankruptcy qualifies as a business
combination under ASC 805, what would be the acquisition date?
3. Should Poor Son apply “fresh–start” reporting under ASC 852?
4. May Poor Son apply pushdown accounting in its standalone financial statements?
Analysis- Issue 1: Does Parent’s purchase of a legal subsidiary in bankruptcy qualify as a
business combination under ASC 805?
FASB Accounting Standards Codification (ASC) 805-10 (Business Combinations) provides
guidance on determining whether the purchase of a subsidiary under bankruptcy qualifies as a
business combination for the acquirer. In order to determine whether the acquisition files under
the definition of a business combination, it is required to understand what specific transactions
would follow the guidelines. According to ASC 805-10:
