Down Round Feature

Posted by & filed under Derivatives, Equity-Linked Transactions, Indexed to Own Stock.

A down round feature in a financial instrument (or component of an embedded feature) reduces the strike price the financial instrument after its issuance if the seller issues shares of its stock at a price lower than the strike price of the financial instrument or issues issues an equity-linked financial instrument having a lower strike… Read more »

Calculating the Constant Yield Using Excel

Posted by & filed under Debt, Derivatives.

I’ve had numerous requests to show how the constant yield rate for debt cost amortization is computed in the sample Excel effective interest method calculations. The idea is pretty simple once you have the formulas set up. The objective is to determine the rate that drives the amortization balance to zero on the maturity date… Read more »

Derivative Accounting – The Ways Out

Posted by & filed under Derivatives, Equity-Linked Transactions.

Over the last three days, I went through the accounting definition of a derivative. If you have an agreement, or embedded feature within an agreement, that meets the definition, then derivative accounting has entered your life. Unless, of course, one of the scope exceptions applies! And there are many. The vast majority of derivative accounting… Read more »

Clearly and Closely Related Exception for an Embedded Derivative

Posted by & filed under Derivatives, Equity-Linked Transactions.

An embedded derivative feature, in contrast to a freestanding derivative, is evaluated relative to its host contract. Bifurcation of the embedded derivative is not required if its risks and characteristics are clearly and closely related to those of the host contract. If they are clearly and closely related, then the fair value of the embedded… Read more »

Definition of a Derivative – Criteria #3

Posted by & filed under Derivatives.

Today I’ll cover the last of the three criteria to the accounting definition of a derivative. Here are all three one more time: a) There are i) one of more ‘underlyings’ and ii) one or more ‘notionals’ or payment provisions, or both; b) There is no initial investment or an investment that is smaller than… Read more »

Definition of a Derivative – Criteria #2

Posted by & filed under Derivatives.

You’ll recall from yesterday’s post that there are three criteria to the accounting definition of a derivative: a) There are i) one of more ‘underlyings’ and ii) one or more ‘notionals’ or payment provisions, or both; b) There is no initial investment or an investment that is smaller than that normally expected of a contract… Read more »

Definition of a Derivative – Criteria #1

Posted by & filed under Derivatives.

This is the first in a series of posts exploring derivative accounting guidance. The focus of these posts will be the effect derivative accounting has on traditional equity and debt capital raising transactions. I’ll start with the basics and move into some meaty areas that are common pitfalls. There are three criteria to the accounting… Read more »

Freestanding Instruments and Embedded Features

Posted by & filed under Derivatives, Equity-Linked Transactions.

The issue of whether you have a freestanding instrument or an embedded feature is one of scope. ┬áSpecifically, freestanding instruments are potentially subject to accounting standards that are not applicable to embedded features. For example, ASC 480, Liabilities – Distinguishing Liabilities from Equity, applies only to freestanding instruments. Therefore a threshold requirement to further analysis… Read more »