The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...
By Denise Lugo
Dec. 8 — Private companies and development-stage public companies would get some relief from burdensome and complex rules for certain equity-linked financial instruments, according to a Financial Accounting Standards Board proposal.
FASB issued the proposal Dec. 7 to provide a simpler method for accounting for equity-linked financial instruments with “down round” features, a common reference to a round of financing in which investors purchase stock from a company at a lower valuation than the valuation placed on the company’s stock by earlier investors.
Down round features are most common in warrants, convertible debt or preferred stock. Under current rules, the existence of the down round results in derivative accounting, which requires marking them to fair value each reporting period. Under the proposed model, the down round is only valued when it is triggered, so the valuation exercise isn’t required to be performed on a recurring basis.
Under the proposed changes, a company would exclude the down round feature from the assessment of whether the instrument is indexed to the company’s own stock. When the down round feature is triggered, its effects would be recognized as follows:
• for a financial instrument classified as equity, recognize the value of the effect of the down round feature in equity as a dividend;
• for a financial instrument classified as a liquidity, recognize the value of the effect of the down round feature through a charge to net income.
Moreover—or those instruments with down round features that have been triggered—a company would disclose that the feature was triggered, the value of the effect of the down round feature being triggered and the financial statement line item in which that effect is recorded.
Under current rules, a down round feature would generally trigger fair value measurement for warrants and embedded conversion options with a debt host, assuming the underlying shares are readily convertible to cash or the contract provides for a net settlement.
Some companies have said fair value measurement on an ongoing basis creates a significant reporting burden and unnecessary income statement volatility associated with the changes in value of a company’s own share price.
Moreover, many private company practitioners have said they had to hire third-party valuation experts to determine the fair value of the down round feature because of the complexity in applying the guidance.
Companies have until Feb. 6 to comment on the proposed changes, which affect ASC 480.
To contact the reporter on this story: Denise Lugo in New York at firstname.lastname@example.org
To contact the editor responsible for this story: S. Ali Sartipzadeh at email@example.com
FASB’s proposal for simplifying down round features of financial instruments is at http://src.bna.com/kDb.
Copyright © 2016 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)