What difficulties can the embedded features and rights within convertible securities present?
Companies may need to:
- Determine the appropriate classification (i.e., debt or equity).
- Assess the potential earnings volatility resulting from embedded derivatives that may require separate accounting.
- Understand the potential impact on earnings per share.
- Figure out a mix of other accounting and financial reporting complexities.
What drives accounting and financial reporting complexities?
A combination of embedded rights within “hybrid” securities include:
- conversion options
- redemption features
- mandatory conversion features
- increasing rate dividends
- call features
- price protection features (e.g., down-round provisions)
- beneficial conversion features
- make-whole provisions
- registration rights agreements
How PwC can help
As the accounting for complex debt/equity financing continues to evolve, it is important to keep ahead of the issues. PwC can help you:
- train personnel to understand the maze of accounting guidance when evaluating convertible securities
- maintain transparent communication around the key terms being considered and the resulting accounting implications
- establish procedures to monitor any changes to the guidance in accounting for convertible securities.
