What is a Quasi-Reorganization?

A quasi-reorganization is an accounting process under which a business can eliminate a retained earnings deficit. This is done by netting paid-in capital in excess of par against the retained earnings deficit. If the par value is high enough to be harboring additional equity, the capital structure is altered to replace existing shares with lower par value shares, thereby releasing more equity that can be netted against the retained earnings deficit. The process also involves revaluing assets and liabilities to their fair market values.

When to Use a Quasi-Reorganization

A quasi-reorganization is only allowed in a few situations, and where the shareholders agree to the restatement. The result is an organization that appears to have a reasonable balance sheet. This may give the appearance of financial health, which can persuade suppliers and lenders to grant credit. The quasi-reorganization concept is rarely used, since it essentially papers over a deficit; it does not reflect any operational improvement.

Advantages of a Quasi-Reorganization

Going through a quasi-reorganization allows a business to eliminate a retained earnings deficit, which has multiple benefits. First, it gives the impression of financial health, which may attract new investors and lenders. Second, it may allow the business to resume paying dividends to its investors, which might otherwise be prohibited under the terms of any outstanding loan covenants. However, these benefits will be short-term in nature if management cannot fix the underlying issues that caused the retained earnings deficit in the first place.