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Investors should determine whether an investment is substantially similar to common stock based on information that exists on the date the investor determines that it has the ability to exercise significant influence. This date may be subsequent to the date that the investment was originally acquired. For example, subsequent to an initial investment, an investor may obtain representation on the board of directors that gives it the ability to exercise significant influence over the investee’s operating and financial policies. At this point, the investor would perform the initial assessment as to whether its investment is considered in-substance common stock.
As noted in ASC 323-10-15-16, an investor should reconsider its initial determination if any of the following occur:
  • The contractual terms of the investment are amended, resulting in a change in one or all of the characteristics described in EM 1.2.1. For example, a change in the form of the investment, such as an exchange of preferred stock for another series of stock, is generally considered a reconsideration event. An expected change provided for in the original terms of the contractual agreement would generally not be considered a reconsideration event.
  • There is a significant change in the investee’s capital structure, including the investee’s receipt of additional subordinated financing. For example, an increase in both the number of shares and value of outstanding common stock could affect whether the subordination characteristics of an investment are substantially different from that of common stock.
  • The investor obtains an additional interest in the investment. When reconsidering the characteristics of the investment, an investor should consider its cumulative position in the investment (including both new and existing interests) and the facts and circumstances that existed at the time the additional interest was acquired.
The determination of whether an investment is similar to common stock should not be reconsidered solely due to losses of the investee, even if those losses change the investee’s capital structure. Rather, an investor should only reconsider whether its investment is substantially similar to common stock when one of the identified reconsideration events or conditions occurs.
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