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Debt, quasi-debt, warrants, and equity securities continue to be sources of restatements and revisions due to errors in the application of the relevant guidance. The accounting for such items often includes critical accounting estimates that require significant judgment. The SEC staff has focused on the transparency and quality of the disclosures about those judgments and estimates, frequently requesting:
  • the registrant’s consideration of conversion and redemption options in determining debt or equity classification;
  • support for the classification of financing transactions as extinguishments or modifications of debt; expanded disclosures of the material terms of debt agreements;
  • support for the exclusion of certain convertible notes and other debt instruments from the computation of diluted earnings per share; and
  • expanded disclosure of purchase of investments, sales of investments, and proceeds from maturities of investments separately between available-for-sale debt securities and held-to-maturity debt securities.
Comment examples
Guidance references
  • We note your disclosure that you concluded your preferred stock holdings are not considered equity securities subject to ASU 2016-01. Please provide us with your accounting analysis supporting this conclusion. Specifically detail how you considered if the securities met the definition of an equity security and discuss how the redemption provisions impacted your accounting determination.
  • Please tell us your consideration of providing a description of the accounting method used to adjust the redemption amount of the redeemable preferred stock for changes in the redemption value and disclosing (1) the redemption amount of the preferred stock as if it were currently redeemable and (2) the reasons why it is not probable that the preferred stock will become redeemable. Please refer to ASC 480-10-S99-24.
  • Please tell us, and revise future filings, to present purchases of investments, sales of investments, and proceeds from maturities of investments separately between available-for-sale debt securities and held-to-maturity debt securities in accordance with ASC 320-10-45-11. If you had material sales of held-to-maturity securities during the periods presented, please tell us how these securities were appropriately classified as held-to-maturity prior to sale under ASC 320-10-25.
  • You state that the convertible senior notes have been excluded from the computation of diluted earnings per share since the conversion price of the convertible senior notes exceeded the average market price of your common stock. Please provide us with an analysis supporting your accounting and tell us how you considered ASC 260-10-45-44 in reaching your conclusion.
  • Revise future filings to provide all of the disclosures required by paragraphs 50-4 through 50-6 of ASC 470-20 for your convertible debt instruments that may be settled in cash. In this regard, revise to also describe the specific conversion features of each debt arrangement and discuss how the features and the host instrument are accounted for and valued in your financial statements.
  • Please disclose the pertinent rights and privileges of the preferred stock, including dividend and liquidation preferences, participation rights, unusual voting rights and other terms. Please refer to ASC 505-10-50-3 through and 50-5.
  • In future filings, please expand your disclosures to include the significant debt covenants and how financial ratios are calculated. Since information about debt covenants is material to an investor's understanding of the company's financial condition and/or liquidity, please include a separate discussion of material debt covenants in the MD&A and factors that may impact their calculations.
  • We note the disclosure of the amendment to the credit agreement entered into, which appears to have been entered into primarily to extend the termination date of the revolving credit facility. Given the remaining availability under the credit facility at the balance sheet date, and the fact that your debt maturities (due within one year) are greater than the remaining availability under the credit agreement, please tell us and confirm that in future filings you will more clearly disclose your plan for satisfying your debt obligations with your current and expected sources of liquidity.
  • We note from your disclosure that you exchanged outstanding notes for new notes. Please tell us how you determined the exchange transaction qualified as a debt modification under the guidance in ASC 470-50-40-6 through -12. In doing so, provide us with your cash flow present value calculations for the original and new notes under ASC 470-50-40-12. Confirm that you performed your 10% test on a lender-by-lender basis and clarify how you treated put and call options on the underlying debt.
  • In future filings, please ensure your disclosures clearly disclose any gains or losses that may have resulted from the extinguishment, including where the gains or losses are presented in your financial statements.
  • We note from your disclosure that your secured notes and term loan exchanges were accounted for in accordance with ASC 470-60 resulting in a net gain of extinguishment of debt. Please explain in further detail why these transactions were accounted for as a troubled debt restructuring rather than a modification or extinguishment pursuant to ASC 470-50 and how the gain on extinguishment was calculated.
Podcast: Debt, warrants, and equity: What’s trending in SEC comments
Financing transactions guide
Financing transaction guide: 3.1 Overview of debt modification and extinguishment
Financial statement presentation guide - Chapter 5: Stockholders' equity
Financial statement presentation guide - Chapter 12: Debt
Podcast: Full disclosure: Debt
Podcast: Impairment toolkit: Financial instruments
Podcast: Accounting for debt in uncertain times: 5 things to know

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