Financial reconstruction
Financial reconstruction changes the arrangement of an organisation's debt, equity or other claims. It may involve renegotiating payment terms, converting debt to equity, raising new capital or adjusting creditor claims, depending on the situation and applicable law. Assess whether the underlying business can generate sustainable cash flows, how each stakeholder is affected, the feasibility of approvals and the value of alternative outcomes. A reconstruction may alter control and risk; it cannot fix an unviable operating model by relabelling liabilities.
Worked example
A company cannot meet near-term debt repayments but has a viable operating business. Lenders agree to extend maturities and convert part of the debt to equity, while owners contribute new cash. The plan is assessed against liquidation and other realistic alternatives.
Common mistake
Assuming a reduction in recorded debt automatically creates value without considering dilution, creditor concessions, future cash flows and implementation costs.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |