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Financial instruments
Solving accounting and reporting challenges related to complex financing transactions, derivatives and hedging
Both private and public capital markets afford companies a variety of option to raise capital through the issuance of debt, equity, and other hybrid or equity-linked instruments. These instruments can be used to raise capital to fund day-to-day operations or finance significant acquisitions. In making the determination of which instruments best optimize an entity's capital structure, finance professions need to be aware of the complex and evolving guidance related to accounting for these instruments. Additionally, entities are exposed to a wide range of both financial and nonfinancial risks. Entities may wish to engage in risk management strategies using derivative instruments in order to reduce the impact of these risks. Hedge accounting standards may allow companies to report the effect of these derivatives inline with those risk management strategies provided they meet the complex requirements to apply hedge accounting.
What drives accounting and financial reporting complexity for financial instruments?
Derivative instruments require fair value accounting which can create income statement volatility.
Company's need to navigate complex accounting principles to determine debt versus equity classification of financing instruments.
The rules for hedge accounting are complex and vary depending on the specific hedging strategy employed.
Certain instruments contain embedded features, such as conversion features or redemption features, that may have to be bifurcated and accounted for as derivatives.
How PwC can help
PwC has teams of talented professions who have experience working with key stakeholders to navigate the economic characteristics of the instruments and the accounting objectives. Working with stakeholders, PwC can help you:
- Identify provisions that may impact classification or derivative accounting
- Consider the impacts to earnings per share for equity-linked contracts
- Optimize hedging strategies and establish accounting processes
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