Technical Accounting & SEC Reporting

Debt versus equity

• Debt and equity are two categories of external finances that businesses use for funding, and oftentimes, they are used in combination based on the unique needs of each company. The accounting for these transactions may be complicated and result in an accounting conclusion that is unexpected, or even undesired. For example, it is possible to issue an equity instrument, such as a warrant or a preferred share, which ultimately is accounted for as a liability at fair value or mezzanine debt instead of equity.

  In order to achieve the desired accounting for new issuance of debt or equity, our consultants can review your transactions prior to their execution to ensure the language and terms included in the document result in the desired accounting. For transactions that have already been executed, H4D can review the agreements and document the appropriate accounting conclusions for your internal records and your auditors.

  Consult our team of technical accounting consultants and achieve the most value and capital-raising opportunities for your business.

Bankruptcy and Fresh Start

• Bankruptcy refers to the legal discharge of a business’s debts after a company files with a court in accordance with the US Bankruptcy Code. A filing under Chapter 7 results in the liquidation of the entity. A filing under Chapter 11, referred to as a reorganization, allows the company to continue its operations while a plan is put in place to return assets to the creditors, including a transfer of ownership of the company from its shareholders to the creditors. Both filings have complex accounting rules which companies must follow.

  Chapter 7 filings must follow liquidation accounting, which requires the revaluation of the company’s assets and liabilities at the amounts expected to be paid or collected, in addition to requiring new disclosures concerning the filing. Chapter 11 filings will require the company in bankruptcy to provide additional disclosures and change the reporting of its liabilities. Upon emergence from bankruptcy, the company may be required to adopt Fresh Start Accounting, which requires the company to revalue all of its assets and liabilities at fair value, eliminate retained earnings, and provide extensive disclosures around the accounting for and valuations used for its emergence. These concepts are incredibly complex, time-consuming, and require extensive experience. Our firm will help you navigate the accounting landscape and successfully emerge with the appropriate accounting, disclosures, and documentation.

  Contact our team of experts to help you navigate bankruptcy accounting.

Leases

• A lease involves a contract between two parties with one party seeking the rights to control a specified asset controlled by the other party. Determining whether a contract is a lease and if the lease includes an embedded derivative requires specific knowledge of lease accounting in accordance with ASC 842 and derivative and fair value accounting within ASCs 815 and 820. Our team can help you identify and document whether a contract meets the definition of a lease, what classification of lease it is, and prepare the appropriate journal entry schedules. We will also help you conclude and document if an embedded derivative exists, determine how to fair value the derivative, and prepare the appropriate journal entries and ongoing valuation methodologies.

  Contact us today and we will assess the type of lease for your unique needs, disclosure requirements, and model entries.

Business Combinations

• A business combination refers to an entity that obtains control over one or more unaffiliated companies, most commonly through a purchase transaction. This may look like purchasing the net of assets or equity interests of a business in exchange for consideration, such as cash or equity interests in the acquiring entity. A business combination is distinct from an asset acquisition, in which a company purchases an asset or a similar group of assets.  

  The accounting for a business combination is significantly more difficult than the accounting for an asset acquisition. An asset acquisition is simply capitalized based on the fair value of the consideration given to the seller, plus the costs to acquire the asset. A business combination requires the assets and liabilities of the acquired company to be fair valued. There are also significant disclosures required for a business combination. For public companies, if the combination is deemed to be material in accordance with SEC rules, there are even more significant public filings that must be provided which detail what the combined companies would have looked like in the past (pro forma financials).  

  Our consultants are experts in determining whether an acquisition meets the definition of a business combination or an asset acquisition and providing the appropriate guidance to follow either method of accounting and disclosure.

  Contact our professionals for more information on business combinations.

Revenue Recognition (ASC 606)

• Revenue recognition refers to the Generally Accepted Accounting Principle (GAAP), which determines the unique conditions in which revenue is recognized and accounted for. Essentially, The Accounting Standards Codification for revenue recognition (ASC 606) provides a solid framework for recognizing revenue from contracts with clients. Revenue is the foundation of all business performance, and revenue recognition is a complex accounting policy that must be appropriately assessed, documented, and implemented. The basic principle of ASC 606 consists of a five-step model for recognizing revenue which must be documented and consistently applied by a company. H4D’s expert consultants have implemented this standard for a number of companies.

  To learn more about revenue recognition, contact a consultant with the experience to navigate through the rules and regulations of revenue recognition.

Derivatives

• A derivative describes a contract whose value is derived from changes in the price of an asset, ratio, or other observable input. Examples include a change in interest rate, commodity price, credit rating, or foreign exchange rate. Accounting for derivatives under US GAAP is covered by ASC 815 and ASC 820. Our services include valuation methodologies, journal entry creation, disclosure requirements, assessing whether a contract meets the definition of a derivative as a whole or contains an embedded derivative, assessing whether there are scope exceptions to avoid recognizing the derivative, and documentation of all the above. We can also train your staff to self-sufficiently identify derivatives in the future.

• To learn more about derivative accounting, work with a consultant who can help you navigate the complexities of derivative accounting.