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 »

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 »

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 »

Conventional Convertible Debt

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

Conventional convertible debt is a technical definition. To be considered conventional convertible debt, the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash determined at the discretion of the issuer. Additionally, the ability… Read more »