Determining Fair Value in Volatile Markets: ASC 820 – FAS 157-3
There are significant issues related to fair valuing securities under volatile market conditions. Market conditions have become volatile, distressed, and illiquid. The Securities and Exchange Commission (“SEC”) and the Financial Accounting Standards Board (“FASB”) have taken positive steps to address serious concerns that application of “fair-value” or “mark-to-market” accounting is artificially depressing corporate balance sheets due to the necessity of using steeply declining market prices to value financial assets. In September and October of 2008, the accounting staffs of the SEC and FASB issued statements and letters to clarify the application of ASC 820 – FAS 157-3 in today's turbulent credit environment.
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Derivative Treatment for Reset Provisions: EITF 07-5
EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" provides guidance for determining whether an instrument is indexed to an entity’s own stock and thus scoped out of derivative treatment. One of the outcomes of this pronouncement is that equity linked instruments with reset provisions are not scoped out of derivative treatment. This is a common provision in many warrants and convertible debt instruments whereby the exercise price of the instrument is reset upon a subsequent event in which lower priced securities are offered by the issuing entity. The reset may be a full ratchet reset or a dilutive reset.
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