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. ¬†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 »

Registration Rights Agreements

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

A registration rights agreement (RRA) typically accompanies an equity-linked transaction and spells out the registration obligations of the issuer. Typically, these obligations are designed to ensure that the shares underlying the equity-linked instrument(s) are freely tradable. In many cases, the only means for the investor to receive return of invested capital and a return on… Read more »

Derivative Settlement Alternatives

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

Settlement alternatives, and the party that controls the settlement alternatives, figure significantly in determining the accounting treatment of an equity-linked freestanding or an embedded derivative. The pre-Codification guidance was contained primarily within EITF-0019, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company‚Äôs Own Stock. The Codification guidance is buried within ASC… Read more »