Whether it be debt, equity, or a combination of the two, financing isn’t always as simple as recording the proceeds and recognizing a single liability or equity. Mike Vanscoy, Principal, offers a checklist of these 7 items to consider under United States Generally Accepted Accounting Principles (GAAP).
1 | Refinancing Current Debt
Refinancing current debt must be analyzed to determine whether the result is a modification or an extinguishment impacting the amount of costs that will be recognized or deferred.
2 | Debt Instruments
Determination of whether debt instruments are to be recorded at fair value if eligible.
3 | Convertible Debt
When issuing convertible debt, features that are embedded in the debt require evaluation to determine if they should be accounted for separately from the debt. When these features are accounted for separately, they are recorded at fair value.
4 | Additional Instruments
Additional financial instruments issued as part of a financing transaction are required to be evaluated to determine whether they are debt or equity and must be recorded at fair value.
5 | Preferred Shares
Issuing preferred shares will require an analysis of whether the preferred shares are a liability or equity including where within equity it should be recorded and must also be recorded at fair value. If the preferred shares are convertible, additional analysis of the conversion options must be done similar to the analysis of convertible debt.
6 | Fair Value
Where fair value is required or selected, companies will typically engage third parties with expertise in valuing financial instruments. Although this will add incremental costs, it is imperative that this valuation work is done correctly for reporting and the appropriate models are used. Financial instruments that are recorded as a liability are subsequently remeasured at each reporting date (i.e., quarterly for public companies).
7 | Increased/New Disclosures
Beyond the reporting, financing transactions will result in increased or new disclosures that must be included within the financial statements.
