1. Define and explain “Fresh Start Accounting”.

Generally, when emergence occurs, a company’s balance sheet is to be restated to Fair Value, as
required by American Institute of Certified Public Accountants. Fresh Start accounting gives a
breath of bookkeeping fresh air to a company that has emerged from bankruptcy. Then, upon
emergence from bankruptcy, the consolidated financial statements of the “successor Company”
apply the provisions of the fresh start accounting in according to Generally Accepted Accounting
Principles (GAAP).
Under fresh start accounting, a new reporting entity, the “successor company”, is
considered to be created, and the recorded amounts of assets and liabilities are adjusted to describe
their fair value. As a result, the reported historical financial statements of the “predecessor
Company” generally are not comparable to those of the “successor Company”.
Based on HBS case study, fresh start accounting requires resetting the historic net value
of assets and liabilities to fair value and becoming a new entity for financial reporting purpose.
Delta’s consolidate financial statement after May 1, 2007, are not comparable to consolidated
financial statements before that date.
2. Identify and explain other methods for measurement of assets apart from historical cost.

The accounting view of asset value is to pressing a very important principle of historical cost,
which is the original cost of the assets, adjusted upward for improvements made to the asset since
purchase and downward for loss in value associated with the aging of the asset. This historical cost
is called thebook value. The generally accepted accounting methods for valuing an asset vary
across different kinds of assets and apart from historical cost methods. Which are used of market
value,valued differently depending on whether they are generated internally or acquired, and
looked up on the way of investment is categorized and the motive behind the investment.

First, we have the short-term assets of the firm, including inventory, receivables, and
cash. These are categorized as current assets. It is in this category accountants are most agreed to
the use of market value. This is some ways allowed to firms in the valuation of inventory, with
three commonly used approaches. First in first out (FIFO), where the inventory is value based
upon the cost of material bought latest in the year. Next, last in first out (LIFO), where inventory
is valued based upon the cost of material bought earliest in the year. Last way of valuation is
weighted Average, which uses the average cost over the year.
In the category of investments and marketable securities, accountants consider
investments made by firm in the securities or assets of other firms and other marketable securities,
including Treasury bills or bonds. The way these assets are valued depends on the way the
investment is categorized and the motive behind the investment. In general, an investment in the
securities of another firm can be categorized as a minority and passive investment or minority and
active investment or a majority and active investment.
Finally, that is last but not least the ways valued of tangible assets. These include patents
and trademarks that probably will create future earnings and cash flows and also uniquely
accounting assets, such as goodwill, that arise because of acquisitions made by the firm. Patents
and trademarks are valued differently depending on whether they are generated internally or
acquired.
3. What are some of the possible reason why Delta Airlines may have extended the lives of
flight equipment and changed the residual values for depreciation purposes four times since
1986?

Delta Airlines need to update the residual value and depreciation of the equipment when taking the
consideration that calculating the life of an aircraft. It requires multiple estimations and
assumptions such as the long-term usage of the equipment, the associated costs to maintain
equipment, the residual life and salvage value, and economic conditions.

There are some of the possible reasons why Delta may have extended the useful lives of
flight equipment. First, the technology and the industry allowed for these aircrafts to simply last
much longer. Through a new technology, aircrafts are better maintained and consistently updated.
Some advances such changing engines from piston to jet engines and new software allows aircrafts
to function more efficiently with less wear and tear and for longer period of times.   

Besides, Delta’s changes in depreciation since 1986 had a positive effect on the
company’s financial statements. Although depreciation does not affect cash flows or revenue, it
gives an effect on the bottom line. By stretching out depreciation, Delta will see a decrease in
depreciation expense resulting in higher net income. This is crucial for not only for Delta Air
Lines, but to all airlines companies as well as intense competition and deregulation in the industry
were being pressured to show more profits and results. Delta achieved this by extending the life
of its equipment and changing its residual values. It resulted in a savings of $127 million in
depreciation expense for year-end December 2007.   

A downside to decreasing depreciation is taxes. With decreased depreciation and

increased net income, Delta’s income taxes increase. However, with higher net income the
company is in a better position to negotiate contracts, has a lower risk factor, can pay higher
salaries and bonuses, and it has a better standing in the industry overall.
4. Explain how Delta Airlines adopted Fresh Start Accounting.

The adoption of the Fresh Start Accountig resulted in Delta becoming a new entity for
financial reporting purposes. Consolidated Financial Statements on or after May 1,2007, are not
comparable to financial statement s prior to that date. Management did combine the results of
operations for eight months ended December 31, 2007, of the Successor; the four months ended
April 30, 2007.

For purposes of management’s discussion and analysis of the results of operations, Delta
combined the results of operations for the four months ended April 30, 2007 of the Predecessors
with the eight months ended December 31, 2007, of the Successor. Delta then compared the
combined results of operations for the year ended December 31, 2007 with the corresponding
period in the prior year of the Predecessor and discussed significant Fresh Start Adjustments which
impacted comparability.

For the depreciation, Delta revalued property and equipment to fair value, which reduced
the net book value of the assets by $1.0 billion. Delta also adjusted the depreciable lives of flight
equipment to reflect revised estimated useful lives. As a result, depreciation expense decreased by
$127 million for the year ended December 31, 2007.

Fresh Start Reporting is required to revalue the assets and liabilities to fair value. Fair
value is estimated based on estimates and assumptions on the guidance prescribed by SFAS
NO.157, “ Fair Value Measurements” (SFAS NO.157). It defines fair value, established a
framework for measurinf fair value and expands disclosure about fair value measurements.

For the long- lived assets, Delta has recorded the flight equipments and other long-lived
assets at $11.7 billion on Consolidated Balance Sheet at December 31, 2007. The value is based on
various factors, including the assets estimated useful lives and their estimated salvage values. Delta
has recorded impairments losses on long-lived assets used in operations when events and
circumstances indicate the assets might be impaired and the estimated future cash flows generated
by those assets are less than their caring amounts. The impairment loss recognized is the amount
by which the assets carrying amount exceeds its estimated fair value.
5. Discuss the factors that can be considered in estimating the economic life of
commercial aircraft.

There are many factors that can be considered in estimating the economic life of
commercial aircraft such as based on physical or economic life, corporate strategy, planned uses,
expected technological changes.

In the factors of physical or economic life consider the issue of physical or economic life
of the modern jet-powered aircraft. The first commercial jet passenger planes were sold in 1957.
Before using this, the majority of commercial aircraft were powered by piston engines, which
subjected airframes to destructive vibrations. Ten-year lives were the norm in airline
depreciation policies and had been for some time. With no real experience with turbofan-
powered planes, management was reasonable in assuming that the new generation of aircraft
would be similar in life span to the old generation.Within the experience showed that the
turbofan engines offered considerably less wear and tear on the airframes and that the physical
life of aircraft powered by jet engines was considerably longer than that of piston-engine
powered planes.

Next is for the corporate strategy. It will be consider by making a long term strategy by
top level management which decide whether to use the turbofan engines or piston engines in this
aircraft. In this case, the top management have to find the most beneficial and advantages for this
two types of engine for the long term useful life and then make a comparison. From the text had
clearly said that the most useful and longer life is turbofan because turbofan have develope much
higher takeoff thrust, are much more fuel efficient and considerably quieter in operation. So by
having a good corporate strategy,can gave a good estimation in the economic life.

Furthermore,by estimating economic life, the company should also think about the
planned uses. It is worth while to use it in a long period before it will be disposal? The aircraft
company should make a survey or make a research in all aspects before they get or afford the
assets especially non-current assets that is use for long time. The company must have plan before
use the asset like before they want to use the turbofan engine they must know the rules,regulation
and steps of the engine because this product is likely the type of product that are very difficult to
handle or product that must be handle by the professionals.
 Last but not least, expected technologies changes. In this case, the company can estimate
by always looking forward to the development of the technologies. By doing this they will
probably will not apart from the latest technology and can adapt and flexible in every changes.

So that in all our estimation for economic life become longer in the life span and lower
our depreciation cost that are likely increase our profitability.
6. In your opinion,should the possible adoption of ‘fresh start’ accounting be open to any
corporation where management feels traditional historical-based accounting no longer
allows them to present a fair picture of the assets,liabilities,owner’s equity,and operating
performance of that corporation?

In my opinion,the possible adoption of ‘Fresh Start’ accounting should not be open to any
corporation, except for the bankruptcy companies.

This is because, it is very complicated to adopt the ‘fresh start’ accounting.That

statement tells that a strict set of rules for restatement and a timeline for implementing fresh-start
reporting. Those executing the restructuring must understand, among other factors, the ways of
determining fair value for tangible and intangible assets, implications of timing issues, including
the start date for fresh-start reporting, and best practices in "pushing down" fresh-start
adjustments to subsidiary entities and underlying .Added to this is the fact that fresh-start
reporting is not a stand-alone process. For companies that qualify, it is integral to the chapter 11
reorganization. The first step in the chapter 11 process is to reorganize the company to create a
solvent, operationally viable entity. A key component is the restructuring and discharge of
certain debt, which is the essence of the reorganization plan.

It is true that many attorneys/lawyers and accountants having bankruptcy

experience, but the requirements of this ‘fresh start’ accounting are beyond most of them.
Without a qualified guide, fresh-start reporting can be a hazardous ,or even disastrous process.
Practitioners and firms with experience in fresh-start accounting, along with other advisers will
be needed to support the individual asset valuations to the company’s external auditors. Know
that stakes are high, the situation tends to be demanding ,and delays will come with penalties,
which requires expertise in this area.
 Furthermore,to apply ‘fresh start’ accounting,a company must met these condition first.

(1) The reorganization value of the entity's assets is less than the total of all claims and
postpetition liabilities

(2) The holder of preconfirmation voting shares will receive less than 50 percent of the voting
shares upon emergence.

These condition shows that not all companies can apply this ‘fresh start’ accounting easily.

Besides, rather than a continuation of the reporting of the old entity, fresh start
financial reporting reflects a new entity with no beginning retained earnings or deficit. In
general, in addition to resetting the value of assets and liabilities on the balance sheet at fair
value, the reporting calls for starting from zero on the income statement, statements of cash flow,
statements of shareholder equity, and other financial statements.So it is quite confused for the
accountants that the company that are not banckrupt.There will be many mistakes in adopt it if
not carefully.

Then,the balance sheet must reflect changes in the debt and equity structure as a result of
the reorganization. In addition, fresh start accounting requires certain disclosures, including:

1. Adjustments to the historical carrying values of assets and liabilities;

2. The amount of debt forgiveness; and

3. Significant matters related to determining the reorganization value, such as the methods
used and key valuation variables.

In conclusion,it is clearly shows that this ‘fresh start’ accounting are very complicated.
‘Fresh start’ accounting are encouraged for those bankruptcy companies and should not be open
to any corporation,although the management feels traditional historical-based accounting no
longer allows them to present a fair picture of the assets,liabilities,owner’s equity,and operating
performance of that corporation.
REFERENCES

1. www.wikinvest.com

2. www.prezi.com

3. http://www.mondaq.com/unitedstates/x/83990/After+The+Bankruptcy+Fresh+Start+Accounting

4. http://garyrushin.com/my_blog/business-restructuring-strategies/chapter-11-bankruptcy-know-
fresh-start-accounting-in-the-restructuring-process/

5. http://www.hl.com/us/opinionadvisory/taxreportingvaluation/freshstartaccounting.aspx

6. http://www.pwc.com/us/en/audit-assurance-services/capital-markets/bankruptcy-reporting.jhtml

7. http://www.complianceweek.com/blogs/colleen-cunningham/reorganizing-take-advantage-of-
fresh-start-accounting

8. Bruns, W. J. (n.d.). Depreciation at Delta Air Lines ; The Fresh Start.