Frequently, small public companies choose to obtain financing from sources which rely on a public company’s stock or underlying warrants to pay off the capital injection or loan. This has led numerous companies to enter into financings which have embedded financial derivatives that have major accounting and valuation issues that can be both costly and time consuming.
Convertible debt, convertible preferred stock and warrants are the three typical financing instruments that could have these issues. The relevant guidance companies must look to include:
Derivative accounting involves isolating and separately assigning fair values to various debt or equity features for which the eventual financial settlement by the public company is not 100% within its control and/or the settlement of certain features is not fixed but instead variable.
We encourage our clients to show us their term sheets prior to finalizing financing. While we cannot help you determine whether the financing is a “good deal” we can discuss with you the potential accounting, valuation and reporting requirements. This will provide you with the necessary information to understand what the consequence of your financing might be on your accounting and reporting.
If a financial derivative exists we can recommend outside experts to value each derivative instrument.
For a no-cost consultation, contact Steven Vertucci at email@example.com.
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