Fixed-for-Fixed Option

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

A fixed-for-fixed option is an option contract the gives the holder the right to acquire a fixed number of a company’s equity shares for a fixed per-share price. The number of shares issuable and the per-share price remain fixed throughout the the life of the contract.

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 »

The Effective Interest Rate Method

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

The effective interest rate method, or interest method as it is referred to by the FASB in the codification, spreads the total cost of debt over the life of the debt at a constant interest rate. This constant interest rate is also referred to as the constant interest yield. The constant interest rate includes the… 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 »

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 »