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Home / Capabilities / Complex Financial Reporting / Complex Financial Instruments
Companies raise capital by issuing debt, equity, and instruments with both debt and equity-like features. To meet investor’s demands, these instruments are often complex and commonly issued in combination with other financial instruments or contain various embedded features. The combination of instruments and features increases the complexity of the accounting analysis and often require valuation procedures to be performed.
The accounting for these instruments is complicated and auditors generally consult with their national offices to ensure appropriate accounting is applied. Opportune’s subject matter experts streamline this process with robust and best-in-class documentation that has been tried and tested by all the national accounting firms.
Determining the appropriate accounting complex financial instruments, such as preferred stock, convertible debt, warrants and other equity linked instruments, can be complex and time-consuming. To properly apply the numerous rules and exceptions in U.S. GAAP, an issuer may need to closely analyze an instrument’s terms and conditions and the related facts and circumstances. The outcome of this analysis can significantly affect the classification, measurement, and earnings impact of these instruments.
Determining whether liability classification is required
Embedded derivative assessments
Debt modifications
Accounting for transaction costs
The accounting for these instruments often involves the need for valuation services. For each valuation, Opportune pairs accounting experts with valuation experts. This ensures that the valuation is performed in line with the accounting needs and provides for a cohesive deliverable.
Valuation of embedded derivatives
Allocation of proceeds for the issuance of multiple financial instruments
Financial instruments issued in business combinations
10% cash flow tests for debt modification vs. extinguishments
Although certain instruments are issued in the form of equity, the SEC requires certain redeemable equity instruments to be classified outside of permanent equity. We assist our public company clients and our clients that are heading towards an IPO by performing a thorough review of their equity securities to see if the SEC’s redeemable equity guidance is applicable. If so, the SEC requires these instrument to be classified as temporary (or mezzanine) equity between liabilities and stockholders’ equity to highlight the future potential cash obligations attached to these types of securities.
Thorough review of legal documents to identify any contingent events not solely within the control off the issuer that could force redemption.
Coordination between legal and accounting to ensure proper interpretation.
Assist with the initial and subsequent measurement for instruments within the scope the SEC’s redeemable equity guidance
The issuance of complex financial instruments can be new for many companies, resulting in financial reporting complications.
Drafting new significant accounting policy language
Drafting footnote disclosure for the new securities issued
Assistance with setting up templates for calculating basic and diluted earnings per share to include the effect of participating securities, convertible securities, and other equity linked instruments
SPACs, or so-called “blank check companies”, are an alternative and expedient route to going public, but the financial reporting, tax, and governance aspects of the SPAC’s future investments must be considered.
When you choose Opportune, you gain access to seasoned professionals who not only listen to your needs, but who will work hand in hand with you to achieve established goals. With a sense of urgency and a can-do mindset, we focus on taking the steps necessary to create a higher impact and achieve maximum results for your organization.
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