Valuation & Litigation Services Blog


Debt Issuance Takeaways and Suggestions

Part of the Drafting Considerations for Attorneys Blog Series

The fields of law, accounting and valuation are only continuing to become more complex. Given the overlap in these areas of specialty, it is increasingly important for attorneys to have an understanding of the accounting, tax and valuation effects of the legal agreements they draft. Armed with this knowledge, lawyers can produce the intended outcome for their clients and minimize unintentional consequences and compliance burdens. If you would like to download our full E-book, which includes all of the blogs in this series, you can do so here.

Debt Issuance – Takeaways and Suggestions

Debt issuances are often a straightforward exercise from an accounting standpoint. When non-interest-bearing debt, debt with warrants or convertible debt are issued, however, there are unique accounting and valuation issues that must be considered. Many companies, particularly privately held businesses, are not familiar with these issues. A few of the key takeaways and suggestions to keep in mind when drafting these non-standard debt agreements are:

  • Remember that if non-interest-bearing debt is being issued, a debt discount will likely need to be recorded, which will increase the company’s annual interest expense
  • Recognize that there are both financial statement and tax considerations that must be addressed when issuing non-interest-bearing debt
  • Address with your clients the fact that issuing debt with warrants will likely require an initial valuation and may require quarterly/annual valuation of the company in order to determine the fair value of the warrants issued
  • Review and discuss the warrant agreement with the company’s auditor in order to determine whether equity or liability treatment will be required based on the language in the agreement
  • Consider whether the conversion provisions for convertible debt create a beneficial conversion feature for accounting purposes, which may result in some complicated accounting requirements that the company may prefer to avoid

Our E-book, Valuation Considerations When Buying or Selling a Business – Part 2, includes all of the blogs in this series. We invite you to download it here.

If you have questions about the topics covered in this blog, or Skoda Minotti’s Valuation and Litigation Advisory Services, please email Sean Saari or call us at 440-449-6800.

Valuation Considerations When Buying or Selling a Business - Part 2

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