Dataline: Accounting for certain equity-linked financing transactions (No. 2011-25)

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Dataline / In depth 07/07/2011 by Assurance services
Dataline: Accounting for certain equity-linked financing transactions (No. 2011-25)

At a glance

Many companies, public and private, issue equity-linked securities for a variety of reasons, including obtaining capital to fund current liquidity needs and expand future operations. Including equity-linked features in a financing transaction frequently enables companies to lower cash interest costs due to the value of the equity-linked feature. This Dataline is intended to assist companies in evaluating the accounting for equity-linked financing transactions at issuance and on an ongoing basis.

Many companies, public and private, issue equity-linked securities for a variety of reasons, including obtaining capital to fund current liquidity needs and expand future operations. Including equity-linked features in a financing transaction frequently enables companies to lower cash interest costs due to the value of the equity-linked feature.

Equity-linked transactions can take many forms, may be highly complex, and may involve various security offerings and enhancements that benefit the company or attract investors. Examples include:

  • Debt instruments with detachable warrants for preferred/common equity instruments,
  • Debt instruments with variable share forward delivery agreements (i.e., mandatory units),
  • Conventional convertible debt,
  • Non-conventional convertible debt, including convertible debt that may be settled or partially settled in cash, and
  • Convertible preferred stock.

To properly account for these issuances, companies need to perform a detailed analysis to obtain a thorough understanding of the transaction — including understanding the terms of each instrument issued, the underwriting agreement, and any related derivatives that may be entered into with a broker-dealer in connection with the transaction. After completion of this analysis, companies must navigate complicated accounting guidance that in some circumstances requires significant judgment.

This Dataline is intended to assist companies in evaluating the accounting for equity-linked financing transactions at issuance and on an ongoing basis. It is not intended to be comprehensive and should be read in conjunction with the relevant authoritative accounting literature. Many companies may choose to engage subject matter experts with knowledge of various types of financial instruments to assist with this analysis given the complexities that may arise.