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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 around 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; and
  • expanded disclosures of the rights and privileges related to preferred stock and material terms of debt agreements.
Comment Examples
Guidance references
  • Please disclose the nature of the redemption features related to the preferred shares and why amounts are not currently redeemable. Additionally, please disclose the features of the preferred shares that lead you to classify amounts as liabilities as opposed to equity.
  • 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.
  • 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.
  • We note that you extinguished debt plus accrued interest by issuing common shares to a related party. Please tell us whether you applied extinguishment accounting, and if so, please explain to us how you determined the reacquisition price of the debt. Please refer to ASC 470-50-40-2 and 40-3.
  • 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.
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