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Navigating a Significant Recapitalization at Year-End

Navigating a Significant Recapitalization at Year-End

Very close to year-end, a technology client experienced a recapitalization resulting from the conversion of numerous outstanding warrants and preferred shares into a combination of common shares and other classes of preferred shares. All the accounting needed to be done in a very short period to meet year-end reporting requirements.

Challenge

The transaction was the result of several prior transactions and required a detailed technical analysis to ensure all the appropriate entries were made for the preparation of year-end reporting and the subsequent audit. Another result of the recapitalization was that one of the client’s investors became the controlling interest, which now required additional reporting and disclosure requirements for their financial statements and the financial statements of that investor.  

Solution

We reviewed all the agreements related to the recapitalization and summarized the many aspects of the transaction into a technical paper that highlighted those aspects which most significantly impacted the accounting. In addition, we provided all the necessary entries needed both in the client’s general ledger as well as their equity reporting platform, Carta.  

Their external auditors noted that the clean, concise summary of the transactions we provided and the mapping of the entries flowing through the general ledger significantly reduced the amount of time they spent trying to understand and audit the transaction.  

Outcome

The client realized several positive outcomes: 

  • We prepared a concise paper and model that clearly explained and supported the accounting for the transaction. 
  • External audit fees and time were reduced as the auditors had initially determined that their review of the transaction could lead to higher fees during the audit process. After reviewing our work, however, it was determined that they did not need to put additional effort into their review of the transaction.  
  • Client data in Carta was accurately reflected as we performed the review and made necessary adjustments to preserve the integrity of the capitalization table in the software.  
  • We provided guidance into the new reporting requirements necessitated by the change-in-control and have turned that into a recurring review that we perform for the client.  
  • To assist them with minimizing the amount of franchise tax paid, we identified and continue to help the client with the franchise tax impact of the increased number of shares authorized as a result of the transactions. 

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