Financial reorganization
In one sentenceA procedure under the Bankruptcy Law that allows a distressed debtor to negotiate with its creditors a plan to pay and restructure its debts while continuing its business.
Simply put
The debtor submits a proposed plan (rescheduling debts, reducing them, selling non-core assets, bringing in a new partner) on which the creditors vote, under the supervision of the competent court and a reorganization trustee. Claims against the debtor may be suspended during the procedure to give it a chance to recover.
For accounting: changing the terms of debts may change how liabilities are measured under IFRS 9, and a final reduction of a debt usually shows up as a gain in the income statement.
Worked example
A business owes a major supplier 1,000,000 SAR, and the creditors approved a plan that reduces the debt by 20% with the rest paid over 24 months. The calculation is simplified and ignores present value.
Reduction: 1,000,000 × 20%200,000 SAR
Debt after the plan: 1,000,000 − 200,000800,000 SAR
Monthly installment: 800,000 ÷ 2433,333.33 SAR
Gain on debt reduction in the income statement200,000 SAR
Don't confuse it with
Company liquidationReorganization tries to keep the business running, while liquidation ends it and sells its assets.