While preparing for the next client argument, I mean discussion, involving the issuance of convertible debt I was reminded of the additional effects certain provisions of EITF 00-19 has on other outstanding financial instruments \/ derivatives.<\/p>\n
As anyone with outstanding convertible debt is aware, the key point to simplifying the accounting for any conversion feature that appears to require derivative accounting is to force the feature into being classified as permanent equity.\u00a0\u00a0 In general, the best way to classify the resulting derivative as permanent equity is to convince yourself, your auditor, and in most cases the SEC, that your debt qualifies as a \u201cconventional convertible debt\u201d as unclearly defined by paragraph 4 of EITF 00-19 and then by the equally obscure EITF 05-02.<\/p>\n
Since most agreements contain provisions for adjustment to the conversion price for various things including additional capital raises or obtaining certain performance milestones, conversion features generally require liability classification.\u00a0 These are not the standard \u201canti-dilution\u201d provisions referred to in the standards.\u00a0 Most conversion price adjustments, regardless of how remote, generally mean the ultimate number of shares required on conversion is indeterminate on the date the debt is issued and likely exceeds the number of shares authorized \u2013 requiring liability classification.<\/p>\n
Now that you have been politely reminded by your auditor and \/ or the SEC you may have additional liabilities and on-going income statement effects, the next step, which is often overlooked, is to review all other vested outstanding options and warrants (non-employees only) while the convertible is outstanding.\u00a0 Since you already determined you don\u2019t have enough authorized shares to settle the convertible debt you also don\u2019t have enough shares to settle all other non-employee vested options and warrants.\u00a0 As you may have guessed, this requires reclassification of such instruments as liabilities, at their fair value, on the date the convertible debt is issued.\u00a0 Additionally, these newly found liabilities are revalued on subsequent balance sheet dates with the changes included in your income statement.<\/p>\n
The oxymoronic good news:\u00a0 A significant decrease in your stock price generally results in substantial income statements gains from these derivatives.<\/p>\n","protected":false},"excerpt":{"rendered":"
While preparing for the next client argument, I mean discussion, involving the issuance of convertible debt I was reminded of the additional effects certain provisions of EITF 00-19 has on other outstanding financial instruments \/ derivatives.<\/p>\n
As anyone with outstanding convertible debt is aware, the key point to simplifying the accounting for any conversion feature that appears to require derivative accounting is to force the feature into being classified as permanent<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,11],"tags":[4,5,6,7,8,9,10],"class_list":["post-8","post","type-post","status-publish","format-standard","hentry","category-accounting","category-sec-compliance","tag-conversion","tag-convertible-debt","tag-derivatives","tag-financial-instruments","tag-financial-statement","tag-liabilities","tag-reclassification"],"_links":{"self":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/8","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=8"}],"version-history":[{"count":0,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/8\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=8"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=8"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=8"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}