Accounting of quasi reorganization SFAS No.

51

CONTENTS

Paragraph

Preface 01 - 05

Objective 06

Definitions 07 - 08

Recognition and Measurement 10 - 17

Disclosures 18 - 20

EFFECTIVE DATE 21

Paragraphs printed in bold letters are standard paragraphs, which must be read in
the context of the explanatory paragraphs and implementation guidance printed in

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normal letters. There is no requirement to apply this statement on items considered

to be immaterial.

INTRODUCTION

01. Repetitive losses or a significant amount of loss suffered by a company may lead to
a negative retained earnings or deficit. A company in a deficit condition may
experience difficulties in conducting its activities and in financing its operations.
Creditors, investors and suppliers of raw materials may perceive such company as
having a high risk and will tend to avoid it. It is even more complex if the deficit
sustained forced the company to a breach of a specific debt covenant, such as the
obligation to maintain a positive retained earnings, and therefore is obligated to
settle its liabilities immediately. These could push the company into a state of
bankruptcy, although from a viewpoint of business prospect the company probably
still has the opportunity to survive and develop in the future.

02. A quasi-reorganization is an accounting procedure which will enable the company

to restructure its equity by eliminating any deficit and reappraise all its assets and
liabilities, without going through a legal reorganization.In this way it is expected
that will better be able to continue its business, as if from the beginning (fresh
start) with a balance sheet showing the current values without being burden by
any deficit.

03. A quasi reorganization can only be undertaken if there is a sufficient certainty that
after the quasi-reorganization the company will be able to maintain its going
concern status and thrive. This could be achieved if the company, despite deficits
caused by operations in the past, still has a better prospect in the future. Such
prospect may emerged from product development and new market, new
management group or the improvement of economic conditions which can
stimulate the enhancement of operating results. The implication of the going
concern requirement is that a company facing a petition for bankruptcy from its
creditors is not allowed to perform a quasi-reorganization.

04. A quasi reorganization differs from true reorganization , commonly known as

corporate restructuring in respect to the actual cash flows. In a true
reorganization it is possible to convert a liability into an equity, to adjust the
maturity date and the interest rate of a debt, to reduce interest payable or to
suspend payments, to change the classification of stocks or to inject fresh funds in
the form of capital stock and/or loan. Such flow of funds does not exist in a quasi
reorganization, rather there is only a revaluation of all assets and liabilities at their
fair values and the elimination of the deficit to the additional paid in capital and
capital stock. Therefore such reorganization is called a pseudo reorganization. Its
main objective is to eliminate the deficit and present assets and liabilities at their
current values.

05. A quasi reorganization can be performed independently or combined with a

corporate restructuring, for example through the entrance of new investors. If

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the additional paid in capital and capital stock accounts cannot absorb the deficit in
a quasi reorganization, a true-reorganization with additional paid in capital must
be performed.

Objective

06. The objective of this statement is to regulate the accounting treatment of a quasi
reorganization performed by a company.

Scope

07. This statement is applicable to any company undertaking quasi-

reorganization

08. This statement further regulates paragraph 43 regarding reorganization of

SFAS No. 21 Accounting of Equity.

Definitions

09. The definitions of the following terms must be understood in relation to the
statement of this standard.

a. Quasi-reorganization is a reorganization, without going through a legal

reorganization, performed through the revaluation of assets and
liabilities at their fair values and by eliminating the deficit balance.
b. Additional paid in capital is all funds obtained by the company from
capital transactions, other than the capital stock recorded at the par
value. Paid in capital from treasury stock are examples of additional paid
in capital.

Recognition and measurement

10. A quasi reorganization is not merely a way to present a better financial position by
eliminating a deficit. A quasi reorganization is a means to save a company
burdened by a material deficit, whilst the company actually has a good business
prospect.

11. The following conditions must be satisfied by a company to perform a quasi-

reorganization :

a. the company suffers a deficit in a material amount

b. the company must be in a going concern status and has a good prospect
at the time the quasi reorganization takes place.

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c. the company is not facing a petition for bankruptcy

d. is not contravene prevailing laws and regulations
e. the balance of the equity after the quasi-reorganization must be positive.

12. A quasi-reorganization shall be performed using the accounting reorganization

method. Under this method assets and liabilities are revalued at their fair values.
The negative retained earnings balance (deficit) and the revaluation difference shall
be eliminated to the additional paid-in capital account.

13. In the event the additional paid in capital is not sufficient to eliminate the deficit
after the assets and liabilities revaluation process, the balance of the deficit shall be
eliminated to the capital stock account. For this purpose the capital stock shall be
restructured first by reducing the par value and by adding the total reduction to the
additional paid-in capital account.

14. In performing a quasi-reorganization, assets and liabilities must be revalued

at their fair values.

15. The fair values of assets and liabilities shall be determined based on market
values. If the market value is not available, the estimated fair value shall be
based on the best information available. The estimates of the fair values shall
be made by considering prices of the same type of assets and a valuation
technique most suitable to the characteristics of the related assets and
liabilities. Examples of the valuation techniques are among others :

a. the present value or discounted cash flow method by considering the level
of the related risks;
b. the option-pricing model;
c. matrix pricing, and
d. fundamental analysis.

16. The difference between the fair values of assets and liabilities and their book
values shall be recognized and recorded in the retained earnings account.

17. The negative balance of the retained earnings account after the process of the
revaluation of assets and liabilities shall be eliminated to the additional paid-
in capital account. If the additional paid in capital is not sufficient, the
negative balance shall be eliminated to the share capital account.

Disclosures

18. The company must prepare a balance sheet as of the date of the quasi-
reorganization. This balance sheet must be compared with the balance sheet
before the quasi-reorganization.

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19. For purposes of the annual financial report, the financial statements must
present the balance sheet at the end of the period before the quasi-
reorganization, the balance sheet on the date of the quasi-reorganization, and
the balance sheet at the end of the latest period.

20. A company performing a quasi-reorganization must disclose the followings :

a. the reason for the company to perform a quasi-reorganization

b. the going concern status of the company and the plans of the
management and the shareholders after the quasi reorganization
reflecting the business prospect in the future.
c. the balance sheet must present the balance of the negative retained
earnings (deficit) which was eliminated and that amount shall be
presented during three years consecutively since the quasi-
reorganization.
d. the notes to the financial statements shall disclose the method of
determining the fair values used to revalue the assets and liabilities at the
time of the quasi-reorganization the retained earnings account must be
footnoted to disclose the date of the quasi-reorganization.

EFFECTIVE DATE

21. This statement is effective for quasi-reorganization taking place after 1

January, 1998.

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