Quasi-Reorganization
Categories: Incorporation
A “quasi-reorganization” is kind of like the Flex Tape of the business world: it can help a company eliminate its financial woes without actually, fundamentally fixing the issue that caused the woes in the first place. Sometimes, companies can find themselves in a situation where they’ve got a big ol’ deficit in retained earnings. This looks bad on the balance sheets, plus it means that the business (a) can’t pay dividends (because paying out dividends when a business is in debt is a no-no), and (b) is likely scaring off some potential would-be investors with its problematic financials.
In some cases, companies in this predicament would go ahead and file for bankruptcy, which is a pretty drastic measure. But there is another option: the quasi-reorganization.
In this situation, the balance books are basically reset to zero. The organization is given a fresh financial start. The game has been restarted. The deficit in retained earnings is reclassified as paid-in capital, and all assets are revalued according to current market value (which is usually lower than the value initially recorded). No debts are actually paid, and no extra money is physically coming in. All you're doing is moving financial data and transactions around to make the books look better.
If this sounds shady, it can be. But sometimes it’s not. For example, it’s not unheard of for a new business to operate at a loss for its first few years. But we don’t want those operating losses following us around for the rest of our lives, so once we start turning a profit, we’ll go the quasi-reorganization route, so we can essentially start over in the eyes of the investment world. Plus, if we move all that deficit stuff over to the paid-in capital side of the equation, we can start paying out dividends, which shareholders tend to like. It’s not an ideal solution all the time, and in fact, it’s not even legal in every state to do this. It’s actually a pretty obscure accounting method in real life, but it just might be a good choice for a company looking to restart its financial game clock.
Related or Semi-related Video
Finance: What is Reduction in Force (RIF...1 Views
and finance Allah shmoop What is reduction in force or
riff firings People like from a reality TV show Well
it was the best of times It was the worst
of times Your company has performed horribly and it needs
to cut jobs well just pay the interest on the
debt it knows so it must reduce its workforce And
it fires well pretty much everyone not in a core
position What is core Well at Ford Motors The people
who make the engines are core the secretary to the
person who lobbies the Gove to say nice things about
Ford cars Safety track record Well she's not core although
we love her But sorry As the man says you're
fired Reductions in force happened when things go awry and
companies must scramble simply to pay the rent Yeah tough
times but you know welcome to the NFL Reductions enforce
happened for other reasons as well Think some natty combination
of robots replacing highly paid union workers more efficiently and
or the spread in cost between manufacturing your whoopee cushions
in Chicago versus making them in Beijing have a big
spread in those costs Well when the robots can't do
the job better cheaper faster than the humans Why wouldn't
accompany replace the union workers It's way cheaper to hire
robots a mental complaint or strike At some point some
shark manager will ask Why are we fighting this difficult
fight Let's move production overseas And when that goes smoothly
while the company yeah usually induces a gigantic reduction in
force ending the domestic jobs of some multiple thousands of
whoopee cushion makers or W CMEs as they call them
in the trade Or you know in the biz that's
what happens Work forces are obviously a heated topic among
politicians as well Phyllis fired workers generally don't vote for
more of the same because we live in such a
litigious society today Well firing any individual worker could lead
to an ugly lawsuit for a variety of reasons as
well One of them might exist in one form or
another of what is called a protected class and those
classes is comprised subsets of gender sexual preference ethnicity race
age religion and myriad other classes including yes mermaids So
when a giant reduction in force happens and essentially everyone
in the group is fired while the risk of these
kinds of lawsuits is dramatically mitigated but it's sad in
any way shape or form Riffs aren't fun for anyone
and well additionally everyone really loved Martha the PR secretary
who had been at the company for 27 years and
never forgot a birthday Unfortunately the world got rough for
Martha and she had to go to at the end
of the day shareholders on the company And it's their
call is toh how they want it run There is
no crying in baseball but lots of crying when there's
a riff Sorry we're