what is a quasi reorganization 
a quasi reorganization is a relatively obscure provision under generally accepted accounting principles gaap which states that under certain circumstances a firm may eliminate a deficit in its retained earnings account by restating assets liabilities and equity in a manner similar to a bankruptcy a firm s stockholders must agree to allow the accounting change which essentially resets the firm s books as though a new company had incurred the assets and liabilities of the old firm 1 understanding a quasi reorganizationalthough the idea of a quasi reorganization has seen some renewed interest the provision is still rarely applied in practice the idea of a quasi reorganization holds appeal for some as it is an idea of a fresh start and is more exciting to investors than slowly digging out from a large deficit of retained earnings some also argue that quasi reorganizations could be an effective method of more accurately resetting the accounting balances of a firm when a serious drop in asset value is not adequately reflected a quasi reorganization remains highly controversial however since it is not truly a change of economic reality but rather a method to make books appear more favorable quasi reorganizations can carry risks to lenders or suppliers that extend credit to firms that have undergone a quasi reorganization because a quasi reorganization makes a company s balance sheet look stronger this brings comfort to lenders in extending credit if the lenders were aware of the actual financial situation of the company they perhaps would not lend money or would lend at a higher rate to compensate for the actual risk taken quasi reorganizations usually require disclosure in the financial statements so lenders should make sure to look out for such items 2 benefits of a quasi reorganizationmany new businesses operate at a loss for several years after inception during this period the sales team makes contacts workers are trained processes are improved on and streamlined and brand recognition is cultivated by the time the company turns its first profit a significant retained earnings deficit may have developed additionally a prolonged recession could turn a profitable company into a company with a retained earnings deficit it is often illegal or prohibited by debt covenants to pay a dividend from retained earnings while operating with a retained earnings deficit 3 in this instance the equity cost of capital can increase materially as investors demand more return for perceived risk here a quasi reorganization could make financial sense 