PwC is pleased to offer our updated Financing transactions guide. This guide is intended to help our clients and other interested parties implement and apply the applicable accounting and reporting standards.
The accounting guidance for the issuance, modification, conversion, and repurchase of debt and equity securities has developed over many years into a complex set of rules. This guide provides a summary of the guidance relevant to the accounting for debt and equity instruments and serves as a roadmap to the applicable accounting literature. Portions of this guide assume that ASU 2020-06
, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in an Entity’s Own Equity (Subtopic 815-40)
, have been adopted. This guidance has significantly changed the accounting for convertible debt and has simplified the accounting for contracts in an entity’s own equity. Each chapter discusses the relevant accounting literature and includes specific questions and examples to illustrate its application.
See PwC’s Financial statement presentation
guide for information on financial statement presentation and disclosure of the instruments and transactions discussed in this guide. See PwC’s Income taxes
guide for income tax accounting considerations related to debt and equity-linked financial instruments.
References to US GAAP
Definitions, full paragraphs, and excerpts from the FASB’s Accounting Standards Codification are clearly labelled. In some instances, guidance was cited with minor editorial modification to flow in the context of the PwC Guide. The remaining text is PwC’s original content.
References to other PwC guidance
This guide provides general and specific references to chapters in other PwC guides to assist users in finding other relevant information. References to other guides are indicated by the applicable guide abbreviation followed by the specific section number. The other PwC guides referred to in this guide, including their abbreviations, are:
- Business combinations and noncontrolling interests (BCG)
- Consolidation guide (CG)
- Derivative instruments and hedging activities (DH)
- Fair value measurements, global edition (FV)
- Not-for-profit entities (NP)
- Carve-out financial statements (CO)
- Financial statement presentation (FSP)
- Income taxes (TX)
- Stock-based compensation (SC)
- Transfers and servicing of financial assets (TS)
Summary of significant changes
Following is a summary of the recent noteworthy revisions to the guide. Additional updates may be made to future versions to keep pace with significant developments.
Revisions made in December 2021
- FG 1.2.4 was amended to address the treatment of commitment fees paid in connection with a delayed draw debt agreement.
- Illustrative examples and Q&As related to the analysis of embedded derivatives within debt host contracts were moved from DH 4 to FG 1.6.1 and FG 1.6.2.
Chapter 2, Guarantees and joint and several obligations
- Example FG 2-4 in FG 2.5 was added to discuss whether an arrangement contains a guarantee within the scope of ASC 460 or a warranty when an unrelated third party’s actions cause a monetary loss.
Chapter 3, Debt modification and extinguishment
- FG 3.4.2 and FG 3.5 were updated to address ASU 2021-04.
- FG 3.7.1 was updated to address the treatment of unamortized debt issuance costs when a partial paydown occurs.
- FG 4.3 was updated to clarify that in some cases, a legally issued and outstanding share of common stock may be accounted for as a contract to issue shares.
- FG 5.1 was updated to clarify that in some cases, a legally issued and outstanding share of common stock may be accounted for as a contract to issue shares.
- FG 5.3 was updated to include discussion of whether a feature is exercisable by a party independent of the issuer or the investor, which may be helpful in assessing whether a feature is embedded or a freestanding financial instrument.
- FG 5.4.4 was added to discuss the evaluation of whether embedded put and call options should be bifurcated from a host contract. This guidance was previously included in DH 4.
- FG 5.6.2 and FG 5.6.2A, and related subsections, were updated to discuss the importance of determining the unit of account before application of the indexation guidance and to include examples illustrating the application of the indexation guidance.
- FG 188.8.131.52 was updated to clarify the application of ASU 2020-06 to freestanding financial instruments potentially classified as mezzanine equity.
- FG 184.108.40.206 and FG 220.127.116.11A were updated to include an example addressing a change in control transaction in which the issuer’s shareholders receive the same form of consideration as the equity-linked instrument holder.
- FG 5.6.4 and FG 5.6.5A were added to include a summary of the SEC Staff’s Statement in April 2021 on Accounting and Reporting Considerations for Warrants Issued by SPACs.
- FG 6.5.2 was updated to clarify the appropriate accounting when a convertible debt instrument with a previously separated conversion option that has been reclassified to equity is not converted in accordance with its original conversion terms.
- FG 6.6 was updated to clarify the appropriate accounting when convertible debt issued at a substantial premium is extinguished.
- FG 6.8 was updated to provide an example to illustrate conversion accounting when convertible debt is accounted for entirely as a liability and upon conversion the issuer elects to settle the conversion entirely in cash.
- FG 6.8.2 was updated to clarify when convertible debt with a cash conversion feature is subject to induced conversion accounting rather than extinguishment accounting after the adoption of ASU 2020-06.
- FG 18.104.22.168 was updated to clarify the accounting for an embedded derivative that must be separated from a preferred stock host.
- FG 7.4 was updated to clarify the accounting in rare cases, when the fair value of freestanding liability-classified warrants exceeds the proceeds received in a bundled transaction.
Chapter 8, Accounting for certain contracts to issue shares
- FG 22.214.171.124 was updated to discuss whether certain adjustments to the settlement value of penny warrants may be considered substantive or nonsubstantive when evaluating whether those penny warrants qualify for the “own stock” scope exception.
- FG 8.3 was added to address modifications or exchanges of equity-classified written call options pursuant to ASU 2021-04.
- FG 8.4.1 was updated to discuss the accounting of liability-classified warrants when the fair value exceeds the proceeds received in a bundled transaction.
Chapter 9, Share repurchase and treasury stock
Revisions made in February 2021
- This chapter was added to discuss the effective date and transition requirements, including the transition disclosures, related to the adoption of ASU 2020-06.
This publication has been prepared for general informational purposes, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this publication was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible for any loss sustained by any person or entity that relies on the information contained in this publication. Certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance.
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