AIRA WORKING for REFORM

AIRA committees and individual members have worked on a number of significant legislative issues that affect the bankruptcy practice field. Over the years they have proposed Bankruptcy Code amendments, testified on Treasury Regulations and submitted recommended changes on bankruptcy and tax issues. AIRA proposed changes to fresh start reporting for tax purposes to reduce some of the tax loss resulting from repeal of the stock-for-debt exception, and suggested improvements to operating reports required by the U.S. trustees, among others. Presented below is a summary of some of these activities.

CONGRESSIONAL TAX BILLS—The Association has made recommendations on several occasions regarding debt discharge provisions under Section 108 and preserving net operating losses under Section 382.

SOP 90-7 (ASC 852)—The AIRA developed a written response, after obtaining input from members, to a proposed Statement of Position (SOP) issued by the AICPA Task Force on Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The final statement (SOP 90-7) was issued in November, 1990. Two members of AIRA’s Board were appointed to serve on the Task Force.

U.S. TRUSTEE PROGRAM—The AIRA made the following recommendations to Congress with regard to improvements needed in the U.S. trustee program:

• The time period for which U.S. trustees should be appointed
• Quarterly fee (self-funding) structure
• Uniform Chapter 11 operating reports
• U.S. trustee accounting system to monitor Chapter 11 quarterly fees
• Continuing U.S. trustee flexibility in judgment in monitoring Chapter 11 cases
• Recognition of certain professional services as rendered in the ordinary course of business and therefore not subject to court application and approval

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COMMENT LETTER TO FASB ON SOP 90-7—AIRA’s letter was among six comment letters received on the proposed FASB Staff Position (FSP) SOP 90-7-a, An Amendment of AICPA Statement of Position 90-7. An FASB internal document stated:
The Association of Insolvency and Restructuring Advisors (AIRA) requested that the Board add financial reporting in bankruptcy to its agenda and to consider the supporting materials submitted to the FASB in April 2006. Other respondents were concerned about a lack of guidance surrounding FASB Statement No. 141(revised 2007), Business Combinations.

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AIRA ON KERPS
AIRA was quoted by Judge Lifland in a decision regarding the use of KERPs in In re Dana Corporation. Judge Lifland noted:
Senator Edward Kennedy proposed the amendment to section 503 of the Bankruptcy Code as a last-minute addition to the bill, expressing his concern over the “glaring abuses of the bankruptcy system by the executives of giant companies like Enron Corp. and WorldCom Inc.  . . .  Other members of Congress were concerned that Senator Kennedy’s amendment would preclude responsible companies that needed to retain key employees from being able to reorganize successfully . . . In a letter to Senator Arlen Specter, Chairman, Committee of the Judiciary, the Association of Insolvency and Restructuring Advisors also expressed its concern that the bill could cause considerable harm to companies in bankruptcy and suggested that, “there must be a better approach than handcuffing the judiciary and stakeholders in bankruptcy cases by essentially precluding all KERPs.” [Emphasis added].

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AIRA RESPONDS TO AICPA EXPOSURE DRAFT ON VALUATION
The Association of Insolvency and Restructuring Advisors (“AIRA”) is pleased to comment on the AICPA 10/16/06 Exposure Draft, Proposed Statement of Standards for Valuation Services, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (the “Statement”). We are broadly supportive of the AICPA’s project to establish standards for its members who provide valuation services. We note that the Statement reflects the AICPA’s sensitivity to prior comments provided to it by the AIRA regarding an exemption for court or administrative proceedings. We support the changes made by the AICPA to establish this exemption from the reporting provisions of the Statement.

There are numerous instances where valuation procedures are utilized in the insolvency process. In our review of the Statement we identified additional areas where we believe it would be helpful for the Statement to be more explicit in that regard. These are noted below:

1. Valuation services prior to a bankruptcy filing and/or out of court restructuring – While the exemption from the reporting provisions of the Statement applies to court or administrative proceedings (reference paragraph 52 and Appendix D, 6 to 15), valuation is in many cases an integral element of the discussions and negotiations which frequently occur between a distressed entity and its various creditors and other interest holders. Such discussions may or may not result in a bankruptcy filing. These negotiations are frequently fluid and fast paced. The reporting exemption as stated would not appear to apply in these circumstances, yet compliance with them would be problematic. We suggest that the reporting exemption also be extended to valuation procedures undertaken “in contemplation of” a possible bankruptcy filing.
2. Valuation of the liabilities of an entity in financial distress – The Statement excludes liabilities from its definition of “subject interests” (reference paragraph 1) to which its valuation standards would be applicable. However, it is the experience of our members that debt and trade creditor claims trade in established markets, making the valuation of individual claims and classes of claims is an activity which occurs throughout the insolvency process. We suggest that the development standards should be explicitly applicable to AICPA members who perform such services, but that the reporting exemption apply as the services are performed in conjunction with, or in contemplation of, a court proceeding.
3. Valuation of a bankrupt debtor – The Statement does not provide examples of the types of valuation services which are sometimes provided in connection with a bankruptcy proceeding. These include, but are not limited to: a) the valuation of a bankrupt debtor for the purposes of determining whether a secured party is “under” or “over” secured, and b) establishing “reorganization value” as required by AICPA Statement of Position 90-7 in conjunction with a proposed plan of reorganization and c) establishing liquidation value of a debtor to evaluate the bankruptcy “best interests” test. We suggest that the Statement’s development standards be explicitly applicable to both the “liquidation” and “going concern” valuation analyses performed in these cases.
4. We also suggest that Appendix D to the Statement also include “Illustration” and “Conclusion” comments re 2) and 3) above. These Illustration and Conclusion comments should be included in the “Illustrations Related to Litigation Engagements and Certain Controversy Proceedings” beginning on page 64 (reference Appendix D, 6 – 15). The Conclusions should note the requirement to acknowledge and adjust for the increased risk associated with the distressed entity. The Conclusion comments should also address: a) the issue of the relevant “valuation dates” based on the stage of the insolvency process, b) the need to explicitly state whether the valuation is of the “bankrupt debtor” or of the “reorganized debtor,” and c) the corresponding impact on projected cash flow (and value) of the effects of prospective restructuring and reorganization activities, including assets sales, debt and equity restructuring and forgiveness of debt.
5. 5) Some of our members have expressed concern about situations, more common in consumer bankruptcies, where valuation issues arise regarding exemptions and related situations in bankruptcy were a valuation is needed for several reasons including valuation of a debtor’s ownership interest in a business or an intangible, etc. The trustees and other parties in interest may seek the assistance of a CPA on valuation issues strictly to assist in a settlement phase. There is concern that application of the new standard makes it problematic for the CPA to provide valuation consulting services in this context.

 

LETTER TO CONGRESS ON CHAPTER 11 AND THE AUTO INDUSTRY—December 8, 2008

In the fall of 2008 Congress was involved in months of debate and conflict over possible solutions to the staggering problems of the U.S. auto industry. The Association’s Board of Directors drafted and sent a letter to members of Congress summarizing key ways in which the Chapter 11 process could offer relief and rehabilitation to the severely distressed. automotive industry:. Click here to read the entire text of the letter.

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