Complex Financial Instruments

Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, defines the framework for measuring fair value under US GAAP. Many accounting pronouncements require fair value measurement as defined under ASC 820. The definition of fair value is:

"The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

ASC 820 clarifies several key considerations of fair value measurement for financial reporting purposes. Fair value is the price to sell an asset or transfer a liability and represents an exit price as opposed to an entry price. This exit price may or may not be different than the transaction price. The guidance stipulates market participants act in their economic best interest while maximizing highest and best use for assets in the principal market (or most advantageous market) in which the reporting entity would transact. Moreover, fair value is a market-based measurement which should not be adjusted for entity specific considerations or transaction costs.

Disclosures may be required about the use of fair value measurements and the effect of those measurements on earnings. In situations where significant unobservable inputs (i.e. level 3 estimates) are required, disclosure of those inputs may be necessary. These disclosure requirements are intended to provide transparency to the financial statements and allow users the subjectivity to assess quality of an entity’s earnings.

Oracle Capital has the unique skills and capabilities to assist our clients in designing, understanding, and valuing complex financial instruments based on the fair value framework outlined in ASC 820. We have specialists primarily engaged in the valuation of complex debt, equity and derivative instruments for financial reporting, tax reporting, and management planning purposes. Our analyses are based on the economics of the underlying security, academic finance theories including option pricing theory and the efficient-market hypothesis, and core probabilistic and statistical models from quantitative finance (e.g. Black-Scholes-Merton, Monte Carlo Simulation, Binomial Lattice, etc.). A sample of the types of securities for which we provide valuation services include:

    • Complex capital structures (ASC 718, ASC 480, ASC 815, ASC 320)
    • Tranched preferred (private equity)
    • Rights/obligations to purchase additional preferred shares
    • Warrants on preferred (private equity, ASC 480)
    • Equity based compensation including profit interests (ASC 718)
    • Volatility analysis (ASC 718)
    • Synthetic credit rating
    • Straight debt, callable and putable debt, intercompany debt
    • Mezzanine debt
    • Non-performing and fresh start debt
    • Loans, loan portfolios, lines of credit
    • Debt modifications (IRS Sec 249)
    • Convertible debt and convertible preferred
    • Embedded derivatives in convertible debt, convertible preferred, and other contingent contracts (ASC 815, EITF 07-5)
    • Debt extinguishments (EITF 96-16, EITF 06-6)
    • Effective interest rate on convertible debt (APB 14-1)
    • Auction Rate Securities
    • Asset Backed Securities
    • Mortgage Backed Securities
    • Collateralized Debt Obligations
    • Other structured instruments
    • Interest rate, currency, and commodity swaps, swaptions, forwards, caps, and floors (ASC 815)
    • Hedge effectiveness testing and measurement (ASC 815)
    • Financial and other guarantees (FIN45)
    • Guaranteed Investment Contracts (GICs)
    • Pension assets
    • Carried interest
    • Consolidation of Variable Interest Entities (FIN 46R)