The evaluation of whether an instrument is indexed to the entity’s own stock is applicable to contracts and transactions that are linked to or settled in the company’s equity shares. In order for an equity-linked contract to avoid fair value accounting, it must be both indexed to the company’s stock (the subject of this post)… Read more »
Posts Categorized: Equity-Linked Transactions
One of the requirements (the second of two requirements to be specific) for a contract or contract provision to be considered indexed to the entity’s own stock is that it equal the difference between the fair value of a fixed number of the entity’s equity shares and either 1) a fixed monetary amount or 2)… Read more »
A fixed-for-fixed forward is a contract for the purchase and sale of a fixed number of a company’s equity shares for a fixed per-share price on a specified date in the future. The number of shares issuable and the per-share price remain fixed throughout the the life of the contract.
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.
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, 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 »
One of the interesting side benefits of using Google Analytics on this web site is that I can see the search terms people are using to find the site. When I see a common theme often enough, I write a post to address the search term directly. Today’s topic is derivatives and materiality. When I… Read more »
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 »
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 »
The issue of whether you have a freestanding instrument or an embedded feature is one of scope. Specifically, 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 »