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Journal number 4 ∘ Irine Mamaladze

Expanded Summary

Company reorganization is an usual run of things in modern business. Companies often alliance with each other which are then transformed into a legal entity. Sometimes more powerful rivals join and then devour weaker companies. Growing companies single out (spin-off) certain businesses as separate legal entities to make them more flexible to continue the development. Very large firms are forced to disintegrate as required by the antitrust law  or different interests of major shareholders etc. Modern financial crisis are pushing a number of companies to single out specific assets or businesses in order to pledge them or sell and repay loan portfolio.

In case of absorption and join financial problems are comparatively small-all the company’s  assets and liabilities are transferred  to a successor which is responsible for all of them. As to disintegration or single out (spit off), this time becomes a problem  to divide  assets and liabilities so that the existing  companies should have financial stability and sufficient liquidity.

The structure of assets and liabilities of the newly established or reorganized societies is determined by shareholders how can they formulate and adopt the dividing balance.

After the reorganization each society should have adequate sources  of funds to cover accounts payablesas they had before reforming. These sources are: funds, financial investments, accounts receivables, incomes from having or selling long-term financial investments or non-core assets.

Dividing balance is drawn up when rights, obligations, financial investments, contracts and others are already inventoried. This time not only the basic assets and liabilities recorded in the balance sheet are distributed but also off-balance sheet commitments and the agreements. It is better to set in proper time the contract successor since principle decisions for the reorganization have been made.

As a result of the reorganization it should be possible to cover payables to previous level. The mechanism for this is the achievement of equality the discounted cash flow balance ratio (DCF).

To get present value in the process of discounting the values of positive and negative cash flows which participate in DCF calculation, the following principles are used:

− the present values of elements causing positive and negative cash flows is calculated separately using appropriate discount rate for each assets and liabilities;

−  receivables and financial investment – ¼  of the average annual rate, the society is credited in a quarter.

−  payables – ¼ of average annual rate of VAT to be payed to budget which the society can place (or is capable) in a quarter.

The present value calculation period (the period under review) is recommended to fix for three years (12 quarters) which will start from the date of dividing balance drawing up and finish taking into account limit deadline of payables, then it can be written off.

Payables should be divided into divisible and indivisible. To indivisible payables belong arrears to budgetary and non budgetary funds (in receivables expect VAT), it is not distributed and stays in the society under reorganization.

To divisible payables belong arrears to suppliers and leaseholders, advances received and other payables on which may be appointed other successor with the requirements of law.

Negative cash flow is calculated as the sum of current payables, discounted cash of adjusted payables and discounted payments of fixed capital and interests on loans and credit.

Funds are distributed between reorganized and isolated societies in proportion to the size of their negative cash flows. The repayment of these flows by financial resources must approximately be equal in reorganized and isolated societies.

If any DCF values in any society are more than 5% different from the coefficients of other societies or prereform ones, then receivables must be redistributed but when it is not sufficient the payables must also be distributed.

Private capital should be distributed in such a way as to maintain balance equation in all isolated companies. This time we shall try to equalize net assets ratio with its own and especially with the authorized capital. This allows to achieve “a reserve”  when net assets are below the size of authorized capital (at the beginning of the operation of new companies). which can lead to a reduction of the authorized capital.

The rule of redistribution of receivables and payables in that period which is rotating between the date of dividing balance drawing up and the date of state registration of isolated societies must be described in the succession rules and approved by shareholders together with dividing balance.

In case when payables and receivables appear  in transitional period while the liabilities producing them appear before the date of dividing balance drawing up, then the debt must be attributed to the society under reorganization or to isolated society which was offered the given obligation during the drawing up of dividing balance.

It is appropriate to draw up “interim” dividing balance before the state registration of societies to control the results of the transitional period, succession regulations and financial sustainability of reorganized societies. This will be the balance of societies under reorganization and isolated societies (form1)  for any date of transitional period i.e. the account on changes attached to dividing balance. Parallel with it we can draw up control indicators of start up balance sheets. This is the combination of indicators, calculated for the date of registration of isolated societies  on the basis of  “ Forecast balances of the societies under reorganization and isolated societies”. To calculate correctly the control indicators it is necessary to forecast financial and economic activities of these societies from the date of “intermediate” balance drawing up will the date of registration. Should also be done cash flow budget, profit and loss forecasting account and balance sheet of all created societies.

This interim balance sheet will help shareholders and managers to understand whether the principles and succession rules of dividing balance are protected, whether the state registration of societies is prepared; will facilitate the evaluation of the activities, which the director general has done during the reorganization.

Starting balance sheet is draw up  on the basis of these acts are drawn up on the basis dividing balance, taking into consideration succession rules and should be checked by the representatives of corresponding companies. The shareholders of the companies under reorganization are obliged to assess the adequacy of actual start-up (starting) balance sheet with the interim one and take appropriate administrative measures (awarded bonuses, dismissal).

Implementation of these procedures must provide the creation of financially and economically sustainable new companies as a result of reorganization.