Financing Transactions,PwC's Financing Transactions - 2021

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www.pwc.comFinancingtransactionsPartially updated February 2021

About the Financing transactions guidePwC is pleased to offer our updated Financing transactions guide. This guide is intended to help ourclients and other interested parties implement and apply the applicable accounting and reportingstandards.The accounting guidance for the issuance, modification, conversion, and repurchase of debt andequity securities has developed over many years into a complex set of rules. This guide provides asummary of the guidance relevant to the accounting for debt and equity instruments and serves as aroadmap 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 HedgingContracts in an Entity’s Own Equity (Subtopic 815-40), have been adopted. This guidance hassignificantly changed the accounting for convertible debt and has simplified the accounting forcontracts in an entity’s own equity. Each chapter discusses the relevant accounting literature andincludes specific questions and examples to illustrate its application.See PwC’s Financial statement presentation guide for information on financial statementpresentation and disclosure of the instruments and transactions discussed in this guide. See PwC’sIncome taxes guide for income tax accounting considerations related to debt and equity-linkedfinancial instruments.References to US GAAPDefinitions, full paragraphs, and excerpts from the FASB’s Accounting Standards Codification areclearly labelled. In some instances, guidance was cited with minor editorial modification to flow in thecontext of the PwC Guide. The remaining text is PwC’s original content.References to other PwC guidanceThis guide provides general and specific references to chapters in other PwC guides to assist users infinding other relevant information. References to other guides are indicated by the applicable guideabbreviation 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 and equity method of accounting 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)

About this guide Income taxes (TX) Stock-based compensation (SC) Transfers and servicing of financial assets (TS)Summary of significant changesFollowing is a summary of the recent noteworthy revisions to the guide. Additional updates may bemade to future versions to keep pace with significant developments.Revisions made in February 2021Chapter 10, ASU 2020-06 effective date and transition This chapter was added to discuss the effective date and transition requirements, including thetransition disclosures, related to the adoption of ASU 2020-06.Revisions made in October 2020Chapter 3, Debt modification and extinguishment FG 3.4.13 was added to discuss modifications or exchanges of delayed draw term loans.Chapter 4, Common stock and dividends FG 4.3.3 was added to discuss common stock issuance costs. FG 4.3.4 was added to discuss modifications or exchanges of common stock. FG 4.4.3 was updated to provide additional commentary on dividends in kind.Chapter 5, Equity-linked instruments model FG 5.6 was added to discuss the analysis of a freestanding equity-linked instrument after adoptionof ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) andDerivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), includingexamples. FG 5.8 was added to discuss the additional disclosures required for contracts in an entity’s ownequity after adoption of ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).Chapter 6, Convertible debt after adoption of ASU 2020-06 FG 6 was updated to discuss the accounting for convertible debt after the adoption of ASU 202006, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and HedgingContracts in an Entity’s Own Equity (Subtopic 815-40). The discussion includes accounting forissuances, conversions, and extinguishments. Additional disclosure requirements are alsodiscussed.iv

About this guide The accounting for convertible debt before the adoption of ASU 2020-06, Debt with Conversionand Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in an Entity’sOwn Equity (Subtopic 815-40) was moved to FG 6A.Chapter 7, Preferred stock FG 7.3, including Figure FG 7-3, was added to discuss classification of preferred stock afteradoption of ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20)and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). FG 7.3.2.2 was added to discuss the accounting for a down round feature in convertible preferredstock after the adoption of ASU 2020-06, Debt—Debt with Conversion and Other Options(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic815-40). FG 7.6.1 was amended to clarify the treatment of commitments to issue shares of tranchedpreferred stock as a freestanding instrument after the adoption of ASU 2020-06, Debt—Debt withConversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts inEntity’s Own Equity (Subtopic 815-40). FG 7.7.1 was added to clarify the accounting for paid-in-kind dividends.Chapter 9, Share repurchase and treasury stock FG 9.2.2.2 was amended to discuss the treatment of net cash or net share settled forwardrepurchase contracts in the computation of diluted earnings per share after the adoption of ASU2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives andHedging—Contracts in Entity’s Own Equity (Subtopic 815-40). FG 9.2.2.3 was added to discuss the accounting for prepaid forward repurchase contracts. FG 9.2.4.3 was added to discuss the treatment of accelerated share repurchase programs in dilutedearnings per share after the adoption of ASU 2020-06, Debt—Debt with Conversion and OtherOptions (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity(Subtopic 815-40).CopyrightsThis publication has been prepared for general informational purposes, and does not constituteprofessional advice on facts and circumstances specific to any person or entity. You should not actupon the information contained in this publication without obtaining specific professional advice. Norepresentation or warranty (express or implied) is given as to the accuracy or completeness of theinformation contained in this publication. The information contained in this publication was notintended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctionsimposed 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 thatrelies on the information contained in this publication. Certain aspects of this publication may besuperseded as new guidance or interpretations emerge. Financial statement preparers and other usersof this publication are therefore cautioned to stay abreast of and carefully evaluate subsequentauthoritative and interpretative guidance.v

About this guideThe FASB Accounting Standards Codification material is copyrighted by the Financial AccountingFoundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.vi

Chapter 1:Debt instruments1-1

Debt instruments1.1Overview of debt instrumentsThis chapter discusses the accounting considerations for various types of debt instruments includingthe following topics. Term debt Lines of credit and revolving-debt arrangements Debt accounted for at fair value based on the guidance in ASC 825, Financial Instruments Amortization of deferred debt issuance costs, debt discount and premium Put options, call options, and other embedded features in debt instrumentsSee FG 3 for information on the accounting for debt modifications and extinguishments, and FG 6(post adoption of ASU 2020-06) or FG 6A (pre adoption of ASU 2020-06) for information on theaccounting for convertible debt instruments. See FSP 12 for information on the financial statementpresentation and disclosure of debt instruments, including balance sheet classification.New guidanceIn August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic815-40). The ASU simplifies the accounting for certain financial instruments with characteristics ofliabilities and equity. The FASB reduced the number of accounting models for convertible debt andconvertible preferred stock instruments and made certain disclosure amendments to improve theinformation provided to users. In addition, the FASB amended the derivative guidance for the “ownstock” scope exception (see FG 5) and certain aspects of the EPS guidance.For public business entities that meet the definition of an SEC filer, excluding entities eligible to besmaller reporting companies as defined by the SEC, the guidance is effective for fiscal years beginningafter December 15, 2021, including interim periods within those fiscal years. The one-timedetermination of whether an entity is eligible to be a smaller reporting company is based on an entity’smost recent determination as of August 5, 2020, in accordance with SEC regulations. For all otherentities, the guidance is effective for fiscal years beginning after December 15, 2023, including interimperiods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginningafter December 15, 2020, including interim periods within those fiscal years. The FASB also specifiedthat an entity must adopt the guidance as of the beginning of its annual fiscal year and is not permittedto adopt the guidance in an interim period, other than the first interim period of their fiscal year.Guidance in this chapter has been updated to reflect the new ASU and impacted sections are denotedwith “after adoption of ASU 2020-06” and “before adoption of ASU 2020-06.”1.2Term debtTerm debt has a specified term and coupon. The coupon may be fixed, or based on a variable interestrate. Upon issuance, the issuer recognizes a liability equal to the proceeds (e.g., cash) received, less anyallocation of proceeds to other instruments issued with the debt or features within the debt instrumentitself. The proceeds generally approximate the present value of interest and principal payments of the1-2

Debt instrumentsdebt. Debt should be recognized on the date the proceeds are received (settlement date) rather than onthe trade date.1.2.1Debt discount and premium—after adoption of ASU 2020-06When the proceeds received are not the same as the amount due at maturity, a debt instrument hasbeen issued at a discount or premium.Definitions from ASC Master GlossaryDiscount: The difference between the net proceeds, after expense, received upon issuance of debt andthe amount repayable at its maturity.Premium: The excess of the net proceeds, after expense, received upon issuance of debt over theamount repayable at its maturity.A debt discount may reflect fees paid by a reporting entity to a lender as part of a debt issuance or theissuance of debt at a below market coupon. When a reporting entity issues debt at a discount, itreceives less proceeds than it will repay; thus, the reporting entity is paying a higher effective interestrate than the coupon specified in the debt agreement (i.e., it is paying the coupon and the originalissue discount). Conceptually, a debt discount is a reduction of the carrying amount of a debt liability.A debt discount can also be created by the following: The separation of an embedded derivative (e.g., put option) from a debt instrument. See FG 1.6 forinformation on embedded features in debt instruments The allocation of proceeds to warrants or equity securities issued in connection with a debtinstrument. See FG 8.3.1 for information on debt issued with warrants The adjustment to the carrying amount of a debt instrument as a result of a fair value hedgingrelationship. See DH 5.4 for information on fair value hedgesA debt premium typically reflects the issuance of debt at an above market coupon. A debt premium canalso be created through an adjustment to the carrying amount of a debt instrument as a result of a fairvalue hedging relationship or through the separation of an embedded derivative that is an asset (e.g., apurchased option).As discussed in ASC 835-30-45-1A, a debt discount or premium should be recorded as an adjustmentto the carrying amount of the related liability.1.2.1A Debt discount and premium—before adoption of ASU 2020-06When the proceeds received are not the same as the amount due at maturity, a debt instrument hasbeen issued at a discount or premium.Definitions from ASC Master GlossaryDiscount: The difference between the net proceeds, after expense, received upon issuance of debt andthe amount repayable at its maturity.1-3

Debt instrumentsPremium: The excess of the net proceeds, after expense, received upon issuance of debt over theamount repayable at its maturity.A debt discount may reflect fees paid by a reporting entity to a lender as part of a debt issuance or theissuance of debt at a below market coupon. When a reporting entity issues debt at a discount, itreceives less proceeds than it will repay; thus, the reporting entity is paying a higher effective interestrate than the coupon specified in the debt agreement (i.e., it is paying the coupon and the originalissue discount). Conceptually, a debt discount is a reduction of the carrying amount of a debt liability.A debt discount can also be created by the following: The separation of an embedded derivative (e.g., put option) from a debt instrument. See FG 1.6 forinformation on embedded components in debt instruments The separation of a beneficial conversion feature or cash conversion option in a convertible debtinstrument. See FG 6.7A for information on beneficial conversion features and FG 6.6A forinformation on convertible instruments within the scope of the cash conversion guidance The allocation of proceeds to warrants or equity securities issued in connection with a debtinstrument. See FG 8.3.1 for information on debt issued with warrants The adjustment to the carrying amount of a debt instrument as a result of a fair value hedgingrelationship. See DH 5.4 for information on fair value hedgesA debt premium typically reflects the issuance of debt at an above market coupon. A debt premium canalso be created through an adjustment to the carrying amount of a debt instrument as a result of a fairvalue hedging relationship or through the separation of an embedded derivative that is an asset (e.g., apurchased option).As discussed in ASC 835-30-45-1A, a debt discount or premium should be recorded as an adjustmentto the carrying amount of the related liability.1.2.2Debt issuance costsIssuance costs are specific incremental costs, other than those paid to the lender, which are incurredby a borrower and directly attributable to issuing a debt instrument. Issuance costs include thefollowing. Document preparation costs Commissions, fees and expenses of investment bankers, underwriters, or others Original issue taxes Registration and listing fees Accounting and legal fees Other external, incremental expenses paid to advisors that clearly pertain to the financingCosts that do not qualify as issuance costs include bonuses paid to employees (even if attributed to theemployees’ involvement in the financing), employee performance stock options with long-term debt1-4

Debt instrumentsissuance milestones, and premiums for Director’s and Officers’ insurance policies (even if mandatedby the underwriters).Like debt premiums and discounts, debt issuance costs should be reported as an adjustment to thecarrying amount of the related liability as discussed in ASC 835-30-45-1A.Excerpt from ASC 835-30-45-1ASimilarly, debt issuance costs related to a note shall be reported in the balance sheet as a directdeduction from the face amount of that note. The discount, premium, or debt issuance costs shall notbe classified as a deferred charge or deferred credit.See FG 1.2.3 for information on amortization of debt issuance costs.Question FG 1-1 addresses the accounting treatment of a non-refundable commitment fee paid inconnection with a bridge financing. Question FG 1-2 asks about fees paid in connection with a loansyndication.Question FG 1-1A reporting entity pays a non-refundable commitment fee in connection with an underwriter’sagreement to provide bridge financing in the event the reporting entity’s debt offering is delayed orcannot be executed.Should the commitment fee be included as a debt issuance cost of the debt offering?PwC responseNo. ASC 340-10-S99-2 provides guidance on the accounting for costs related to a bridge financing.The commitment fee should be deferred and amortized over the commitment period. Any unamortizedamount remaining upon the execution of the debt offering should be written off as the commitmenthas expired unused. Even if the reporting entity pays fees to the same underwriter in connection withthe debt offering, ASC 340-10-S99-2 clarifies that the commitment fee and the underwriting feesshould be distinguished for accounting purposes. We believe this guidance should also be applied bynon-public companies.1-5

Debt instrumentsQuestion FG 1-2A reporting entity engages an investment bank to structure a loan syndication on a best efforts basis.Although the debt is not expected to be issued for several months, the bank is entitled to fees duringthe intervening period, based on milestones reached.Presuming the fees incurred qualify as debt issuance costs, should the reporting entity defer these feesprior to the debt issuance?PwC responseWe believe the guidance in ASC 340-10-S99-1 should be applied by analogy. If the reporting entityconcludes that the likelihood of the syndicated loan being placed is probable, the fees should beaccounted for as a deferred asset. If, on the other hand, the likelihood of the loan syndication beingplaced is considered remote, it may be more appropriate to expense the fees as they are incurred.If the loan syndication’s prospects fall somewhere between probable and remote, judgment should beapplied to determine which treatment is more appropriate. Some factors to consider in determiningthe appropriate accounting treatment include whether payment milestones have been and areexpected to be achieved and the reporting entity’s history with respect to previous debt issuances.1.2.2.1Amortization of debt issuance costs of shelf registrationsTo account for debt issuance costs related to a shelf registration, we believe an issuer should apply theguidance in ASC 340-10-S99-1 by analogy. That guidance states that prior to the effective date of anoffering of equity securities, specific incremental costs directly attributable to a proposed or actualoffering of securities may be deferred and charged against the gross proceeds of the offering. However,deferred costs related to an aborted offering (including an offering postponed for more than 90 days)may not be deferred and charged against proceeds of a subsequent offering.The guidance also provides the following: When equity securities are taken off the shelf and sold, a portion of the costs attributable to thesecurities sold should be charged against paid in capital. Any subsequent costs incurred to keep the filing “alive” should be charged to expense as incurred.By extension, we believe a reporting entity should capitalize costs associated with a debt shelfregistration statement as a prepaid expense and allocate the costs to the debt instruments as they areoffered under that shelf. Upon issuance of a debt instrument, the reporting entity should follow theguidance in ASC 470-10-35-2 for amortizing debt issuance costs. See FG 1.2.3 for further information.Any prepaid costs that remain at the expiration of the shelf should be expensed. It may also beappropriate to expense some or all of the deferred debt issuance costs related to an aborted orwithdrawn debt offering. We believe the loss contingency model in ASC 450 should be applied todetermine whether the debt issuance costs are impaired (and should be expensed). Debt issuance costsshould generally be considered impaired when either of the following occurs. It becomes probable that the offering will not result in the receipt of proceeds from the issuance ofsecurities1-6

Debt instruments It becomes probable that the previously deferred debt issuance costs will not benefit the futuresecurities offeringUnder a combined equity and debt shelf registration, all costs should be capitalized as prepaidexpenses and allocated to the equity and debt portions of the registration on a reasonable basis. Eachrespective portion would then be accounted for under the guidance above.1.2.3Amortization of debt issuance costs, discounts, and premiumsASC 835-30-35-2 provides guidance on the amortization of a debt discount or premium.ASC 835-30-35-2With respect to a note for which the imputation of interest is required, the difference between thepresent value and the face amount shall be treated as discount or premium and amortized as interestexpense or income over the life of the note in such a way as to result in a constant rate of interest whenapplied to the amount outstanding at the beginning of any given period. This is the interest method.Although ASC 835-30-35-2 requires the use of the interest method for the amortization of debtdiscount and premium, ASC 835-30-35-4 indicates that other methods of amortization, including thestraight-line method, may be used if the results obtained are not materially different from those thatwould result from use of the interest method. These differences should be analyzed each period formateriality.With regard to the length of the amortization period, it is not clear whether ASC 835-30-35-2 isreferring to the contractual life of an instrument or some shorter period. Although it is commonlyunderstood to mean the contractual life, depending on a debt instrument’s terms and features, it maybe appropriate to amortize any discount or premium over a shorter period.We believe a shorter amortization period, such as the period from the issuance date to the date a put isfirst exercisable, is appropriate when a lender can demand repayment in circumstances outside of areporting entity’s control. Using a shorter amortization period ensures that there will be noextinguishment gain or loss in the event a lender exercises its put option prior to the contractualmaturity of the debt. However, amortization over the contractual life of a debt instrument is alsopermitted.In most cases, debt issuance costs are amortized over the same period as debt discount or premium.This approach is supported by guidance in ASC 470, Debt, CON 6, and other accounting literature.When a debt instrument is puttable by a lender at a price less than the par value, it may be appropriateto use a different amortization period for debt issuance costs than the debt discount and premium. SeeFG 1.2.3.1 for further information. When there is more than one amortization period that is acceptable,a reporting entity should elect a method, apply it consistently, and disclose it.As discussed in ASC 835-30-35-5, the amount chargeable to interest expense pursuant to ASC 835-30(e.g., amortization of debt discount or premium) is eligible for inclusion in the amount of interest costcapitalized in accordance with ASC 835-20.If a debt instrument is accounted for at fair value under ASC 825, the issuance costs should beimmediately expensed. Further, debt discount or premium should not be recorded. To the extent the1-7

Debt instrumentsallocated proceeds received differ from the fair value of the debt instrument, the difference should berecorded in the income statement. See FG 1.5 for information on accounting for debt at fair value.1.2.3.1Amortization period for debt puttable at accreted valueIn general, a discount or premium should be amortized using the interest method over the sameperiod used to amortize debt issuance costs. However, when debt is puttable at accreted value, it maybe more appropriate to amortize a discount or premium over the contractual life of the debt becausethe reporting entity will “retain” the unamortized portion of the discount or premium if the lender putsthe debt prior to maturity. The same is not true for debt issuance costs, since these amounts are paidto third parties and are “lost” when the debt is redeemed at any price.When a debt instrument is puttable at accreted value, we believe the discount or premium should beamortized over the contractual life of the debt such that the carrying amount of the debt is equal to theput price on the date the put is first exercisable. The discount or premium should continue to beamortized such that the carrying amount of the debt is equal to the put price on each subsequent putdate as well. Because the carrying amount equals the price at which the debt can be put, there will beno gain or loss on extinguishment if the lender exercises its put option prior to maturity.Debt issuance costs can either be amortized over the period from the issuance date to the date the putis first exercisable, or over the contractual life along with the debt discount or premium. A reportingentity should elect one of these amortization methods and apply it consistently. When the same periodis used to amortize debt issuance costs and debt discount or premium (e.g., the contractual life), itresults in one constant effective rate of interest for the debt instrument, consistent with the interestmethod. Although issuance costs will remain on the balance sheet after the date the lender canexercise its put option and demand repayment, the same is true any time a reporting entity amortizesissuance costs over the contractual life when the instrument is puttable at an earlier date.1.2.3.2Amortization period for callable debtTerm debt that a reporting entity can call prior to its maturity date is similar to short-term debt thatcan be extended. Increasing rate debt is contractually short term with an embedded term-extendingoption that allows a reporting entity to make it long term; callable debt is contractually long term withan embedded call option that allows a reporting entity to make it short term. Therefore, we believe areporting entity may elect to amortize debt issuance costs, discounts and premiums related to callabledebt over either the contractual life of the debt instrument (consistent with term debt) or theestimated life of the debt instrument (by analogy to the guidance for increasing rate debt in ASC 47010-35-2). A reporting entity should elect one of these methods and apply it consistently. See FG 1.4.1for information on the accounting for increasing rate debt.When the exercisability of a call option is subject to a contingency, the reporting entity should considerthe effect of the contingency on the likelihood the reporting entity can exercise its call option. Incircumstances where the contingency is remote, the estimated life of the debt instrument and itscontractual maturity should be the same.If a reporting entity elects the estimated life of the debt instrument as the amortization period, the lifeused should reflect the best estimate considering the reporting entity’s plans, ability and intent toservice the debt as described in ASC 470-10-35-2, as well as economic factors affecting the desirabilityof calling the debt. There may be circumstances in which the economic factors affecting the desirability1-8

Debt instrumentsto exercise the call option indicate that the best estimate of the debt instrument’s life is its contractuallife.We believe that an accounting policy election should be made as to whether estimates will be updatedfor a specific debt instrument, and that policy should be applied consistently across similarinstruments. A reporting entity may decide that the estimated life is established at the issuance dateand will not be updated.1.2.3.3Effect of covenant violations on amortization periodMany debt agreements contain covenants that the reporting entity must adhere to throughout the lifeof the agreement. Covenants are negotiated between a reporting entity and its lenders and may varyfrom agreement to agreement. Financial ratio covenants, which require the reporting entity tomaintain various financial ratios, are included in nearly every debt agreement. A breach of a covenanttriggers an event of default which may allow the lender to demand repayment (i.e., it becomesputtable).When a covenant violation causes long-term debt to become puttable, the debt and related debtdiscount, premium, or issuance costs should be reclassified as current liabilities; however, we do notbelieve debt issuance costs, discounts, or premiums should be automatically amortized in full upon thereclassification of a long-term liability to a current liability.ASC 470-10-45-7 indicates that the classification of the debt (and related contra accounts) does nothave to be the same as the time frame used to amortize debt issuance costs, discount, and premium. Areporting entity should evaluate its specific facts and circumstances, including the following points, todetermine whether it should amortize its debt issuance costs, discounts, or premiums in full. The nature and existence of active negotiations between the lender and the reporting entity tosecure a waiver, or restructure the debt The financ

Convertible debt after adoption of ASU 2020-06 FG 6 was updated to discuss the accounting for convertible debt after the adoption of ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in an Entity's Own Equity (Subtopic 815- 40). The discussion includes accounting for

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