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Accounting for preferred stock from issuance to retirement · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought leadership from PWC's National Office.
• 0:06
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_03: I'm Heather Horn.
• 0:11
  SPEAKER_03: In today's episode, we discuss preferred shares as we continue our main miniseries focused on accounting topics from our very popular financing transactions guide.
• 0:22
  SPEAKER_03: Preferred stock's a common way for companies to raise capital, especially in today's interest rate environment.
• 0:28
  SPEAKER_03: But did you know that not all preferred stock is accounted for as equity?
• 0:32
  SPEAKER_03: Our guests walk us through this and many other judgments in accounting for different types of preferred stock.
• 0:38
  SPEAKER_03: Even if you think you understand this topic, they will definitely have something to teach you.
• 0:43
  SPEAKER_02: So for those who aren't familiar with preferred stock, it's just a class of ownership, a reporting entity that's senior to common stock, uh, but subordinate to debt.
• 0:52
  SPEAKER_02: So it's in the middle there.
• 0:54
  SPEAKER_02: And the terms of preferred stock can really vary greatly depending on the advan uh the demands of the investor uh and and what the company is looking for.
• 1:03
  SPEAKER_02: So I think that diversity is why the accounting can be complex and probably why we're here today.
• 1:13
  SPEAKER_03: That was Brett Dooley, Deputy Chief Accountant in PWC's National Office, who leads our financial instruments team.
• 1:20
  SPEAKER_03: Brett's joined by Chris Gerdeau, also partner in the national office, who has a lot of hands-on experience in this area.
• 1:26
  SPEAKER_03: Brett and Chris bring their wealth of knowledge and experience to the conversation.
• 1:30
  SPEAKER_03: So let's get started.
• 1:32
  SPEAKER_03: Brett, Chris, welcome to the podcast.
• 1:34
  SPEAKER_03: So nice to have you on.
• 1:36
  SPEAKER_03: And today's topic is a great one, talking about preferred stock.
• 1:40
  SPEAKER_03: This whole month is all about financial instruments, and this whole year is all about our most popular guides.
• 1:46
  SPEAKER_03: And so this is focusing on one of our most popular guides, and preferred stock is actually one of the most popular sections of this guide.
• 1:54
  SPEAKER_03: So obviously, getting lots of questions.
• 1:56
  SPEAKER_03: And I know, particularly in today's interest rate environment, it's a way a lot of companies are raising capital.
• 2:03
  SPEAKER_03: So, Brett, maybe just taking a step back, I think preferred stock is a term people know, but actually knowing what it is, it sometimes is a little different.
• 2:12
  SPEAKER_03: So can you just remind us of what it is and then why companies may be using it?
• 2:16
  SPEAKER_02: Yeah, I love this topic because I think you're right, it does apply to a broad sector of our of our clients and companies, um, and it's an interesting one.
• 2:26
  SPEAKER_02: So for those who aren't familiar with preferred stock, it's just a class of ownership, a reporting entity that's senior to common stock, uh, but subordinate to debt.
• 2:35
  SPEAKER_02: So it's in the middle there.
• 2:36
  SPEAKER_02: And the terms of preferred stock can really vary greatly depending on the demands of the investor and what the company is looking for.
• 2:46
  SPEAKER_02: So I think that diversity is why the accounting can be complex and probably why we're here today.
• 2:51
  SPEAKER_02: Um but I think companies choose to issue preferred stock for a really wide variety of reasons.
• 2:57
  SPEAKER_02: Public companies uh may use it because they don't want to increase the level of outstanding debt, they're focused on their leverage ratios, or just to diversify their funding and and um you know access different sources.
• 3:09
  SPEAKER_02: And typically the terms of that preferred stock that we see issued by public companies are probably more standard and have less bells and whistles uh to them.
• 3:18
  SPEAKER_03: Yeah, lots of utilities like to use preferred stock.
• 3:21
  SPEAKER_03: So at least historically.
• 3:23
  SPEAKER_02: Sure.
• 3:23
  SPEAKER_02: Um when you go into private companies, particularly in startups and early growth uh stage companies, we see them issue preferred stock as really just an alternative form of financing and a way to drive down the interest rate by including features in it, like conversion options that may allow investors to participate in the equity upside of the company while still giving them some downside protection in the form of redemption features or liquidation preferences.
• 3:52
  SPEAKER_02: Um, typically we see the preferred stock that's issued by uh private companies has a lot more features uh associated with that instrument.
• 4:00
  SPEAKER_02: And so that's where we see more of the accounting complications.
• 4:04
  SPEAKER_03: All right.
• 4:04
  SPEAKER_03: Not surprising, I guess, from that point of view.
• 4:07
  SPEAKER_03: So then, Chris, bringing you into the conversation, what are some of these features that we're seeing then in these preferred instruments?
• 4:14
  SPEAKER_00: Yeah, like Brett said, Um, the features can vary greatly depending on the needs of both the issuing company as well as the investor and what they're looking to get out of it and the protections that they're looking for.
• 4:26
  SPEAKER_00: Um there's probably a few common features um that you would see across all the preferred stocks.
• 4:32
  SPEAKER_00: Um one usually you start with is liquidation preference.
• 4:35
  SPEAKER_00: Um and that usually comes into play more, you know, kind of like it's just exit strategies, you know, if you will, with companies.
• 4:42
  SPEAKER_00: Um what happens maybe if if a private company is going public or there's a takeover or something like that.
• 4:47
  SPEAKER_00: And the liquidation preference, it basically, you know, as Brett said, you know, it's it's kind of senior to common stock but junior to debt.
• 4:55
  SPEAKER_00: And it kind of gives like a way of kind of taking uh um the funds that would get collected uh upon either liquidation or or whatever, um, and kind of putting it right in there as to what they would they would get.
• 5:08
  SPEAKER_00: And like I said, a little bit of protection over a common shareholder, but not quite as much as a debt holder.
• 5:13
  SPEAKER_00: Trevor Burrus, Jr.
• 5:13
  SPEAKER_03: Well, and it seems like if I'm putting these two pieces together, then you basically have to have this liquidation preference.
• 5:20
  SPEAKER_03: It's like a sort of feature of all preferred stock, or no?
• 5:24
  SPEAKER_03: Are we going to get into some other features that could make something preferred over if I just think back to the broad definition you gave that it's sort of in between debt and equity from a you know a liquidation preference, then it seems like you would need this.
• 5:37
  SPEAKER_02: But yeah, I I can't think of many preferred stocks we see in practice that don't have a liquidation preference because you know it's often critical to the to the investor demands.
• 5:47
  SPEAKER_02: Um but you could have a preference, you know, just a a dividend preference.
• 5:51
  SPEAKER_02: Yes, is right some some others.
• 5:53
  SPEAKER_02: But I just think the liquidation preference is probably very common.
• 5:56
  SPEAKER_03: Very common.
• 5:57
  SPEAKER_03: All right, so Chris, what are some of these other ones?
• 5:59
  SPEAKER_03: Uh Brad stole some of your thunder with the dividend preference.
• 6:02
  SPEAKER_03: But can you explain that one?
• 6:04
  SPEAKER_00: That's right.
• 6:04
  SPEAKER_00: I mean, the next thing I was gonna mention is dividends.
• 6:07
  SPEAKER_00: Um, you know, dividends are are common in preferred uh stock um investments.
• 6:12
  SPEAKER_00: Uh there's many different ways that the dividends um can be done.
• 6:17
  SPEAKER_00: You know, there's usually some kind of minimum or guaranteed preferred, almost like an interest rate to a debt holder.
• 6:24
  SPEAKER_00: Um, you know, it's usually gonna be stated as some kind of fixed percentage or something like that.
• 6:28
  SPEAKER_00: So it behaves similar um to like an interest rate, and and that kind of gives a little bit more of like the protection, if you will, um that Brett was mentioning before.
• 6:38
  SPEAKER_00: They don't necessarily get paid um every period.
• 6:41
  SPEAKER_00: You know, there's a concept of cumulative versus non-cumulative dividends.
• 6:45
  SPEAKER_00: Um cumulative is more along the lines of that it's kind of like accruing like an interest, and and whether they get declared and paid or not, uh, they will kind of accrue and perhaps increase liquidation preference that we were just talking about.
• 6:57
  SPEAKER_00: So it kind of gets paid on the back end or whatever the takeout is, if it's a conversion or something like that.
• 7:02
  SPEAKER_00: Um cumulative would mean if I don't declare it, don't pay it in the period, it just is kind of like came and went.
• 7:08
  SPEAKER_00: You know, it's it doesn't accrue to anything and it and it becomes a non-event, if you will.
• 7:13
  SPEAKER_00: Um and then there could be additional dividend features.
• 7:15
  SPEAKER_00: Um some get more into a participation with the common equity.
• 7:20
  SPEAKER_00: And so there's like um like a participation right.
• 7:23
  SPEAKER_00: So if there is discretionary dividends declared on the common stock, the um preferred stock would also uh get a similar dividend rate that could be based on the the amount of preferred stock or if there's a conversion on on an if converted basis, which is how much common stock would they have had if they converted today, they get that amount of dividends.
• 7:42
  SPEAKER_00: So various different ways that they can uh get their dividends.
• 7:45
  SPEAKER_03: And I guess maybe I should have started with this.
• 7:48
  SPEAKER_03: We're starting from the point of view you've already run through your liabilities versus equity model and concluded it's these are not liabilities.
• 7:56
  SPEAKER_01: Correct.
• 7:56
  SPEAKER_03: Okay.
• 7:56
  SPEAKER_03: All right.
• 7:57
  SPEAKER_03: I think that's an important point for you have to take one step back before you even get to this point.
• 8:02
  SPEAKER_03: But now that I've said it's not a liability, then I start with these considerations.
• 8:06
  SPEAKER_03: All right.
• 8:06
  SPEAKER_03: So then from that point of view, Brett, what is the accounting model?
• 8:10
  SPEAKER_03: Once I've said, okay, I do have one of these preferred instruments, then how would I think about the accounting?
• 8:16
  SPEAKER_02: Before we go there, um, let's go through another couple features um I think that are that are common in these because some of the accounting that we're going to talk about is dependent on those features.
• 8:26
  SPEAKER_02: So, you know, one of those, maybe Chris, you want to talk for a minute about conversion options that we see a lot in these preferred shares.
• 8:33
  SPEAKER_00: Yeah, we were just mentioning a bit about the conversion options.
• 8:36
  SPEAKER_00: So basically what it is is the preferred shareholder may have the option.
• 8:41
  SPEAKER_00: Um sometimes it could be mandatory, uh, sometimes the issuer could have the option, but the preferred stock would convert into common stock.
• 8:49
  SPEAKER_00: I think probably one of the more common conversion features we see is upon an IPO, like for a private issuance today, upon an IPO, it may automatically convert into the common stock being issued in the IPO.
• 9:01
  SPEAKER_00: But there are also various options that that could be done along the way.
• 9:04
  SPEAKER_00: You know, similar, that's probably more like on an equity side of the preferred stock.
• 9:09
  SPEAKER_00: You know, getting kind of back towards more of the protection side, you know, there could be puts or calls.
• 9:14
  SPEAKER_00: Um so effectively it's a way of cashing out early.
• 9:17
  SPEAKER_00: Um, you know, the the investor has the right to put the preferred stock back to the company for usually some kind of cash, you know, payment.
• 9:24
  SPEAKER_00: Um, that kind of is more aligned with more like like the debt side of you know, where we are between the the middle ground between the two.
• 9:31
  SPEAKER_00: Um and then there could also be other um protection provisions like veto rights or voting rights that just kind of helps the investor kind of have a stake or a say in what's going on in the company.
• 9:42
  SPEAKER_03: All right.
• 9:43
  SPEAKER_03: That's definitely helpful and a lot to look for because I think that does lead then into the next question that I jumped ahead on in terms of what we think about from an accounting perspective.
• 9:53
  SPEAKER_02: Yeah, and I think the accounting starts where you went uh earlier and think about a classification on the balance sheet.
• 10:00
  SPEAKER_02: Um first of all, you have to determine whether the preferred stock is required to be accounted for as a liability.
• 10:05
  SPEAKER_02: Some of these features you know could call that into question.
• 10:09
  SPEAKER_02: Um there's an accounting standard, ASC 480, that deals with that.
• 10:13
  SPEAKER_02: Um, and and in some cases, something that is legally in the form of a preferred stock needs to be accounted for as a as a liability.
• 10:21
  SPEAKER_02: Uh if you determine it's not a liability within the scope of 480, then you have to think about where to put it in equity.
• 10:27
  SPEAKER_02: And companies that follow SEC presentation rules need to consider whether the preferred stock needs to be classified as something we call mezzanine equity.
• 10:37
  SPEAKER_03: Yes.
• 10:37
  SPEAKER_03: So I'm going to be talking to Chip Curry later in this series about mezzanine equity.
• 10:42
  SPEAKER_03: So we don't have to go deep into that.
• 10:44
  SPEAKER_03: But once we go through then that classification question, then thinking about measurement, what are some of the things we should be thinking about?
• 10:52
  SPEAKER_02: Right.
• 10:52
  SPEAKER_02: So we talked about a variety of um potentially complicated features, and we need to think about bifurcation of those features.
• 11:00
  SPEAKER_02: Um we financial instruments folk talk about bifurcation like that's a normal word, but but it you know it's essentially looking at an instrument and determining whether there's some feature that needs to be separated from what we call a host contract and accounted for separately as a as a derivative instrument.
• 11:18
  SPEAKER_02: And so the next step in the preferred stock analysis is assessing what is the nature of the host contract itself and whether that preferred stock is economically more akin to a debt instrument or an equity instrument.
• 11:32
  SPEAKER_02: And when Chris was going through features, he said this is could be more debt-like, more protective versus more equity-like.
• 11:39
  SPEAKER_02: It's important to note that I think that assessment is focused on the economics of the instrument and it's different than the classification assessment.
• 11:48
  SPEAKER_02: So it's possible for a preferred stock that I determined to be in the equity or mezzanine classified, but it could still have a debt host for this measurement purpose.
• 12:02
  SPEAKER_02: So, and we can go through that maybe in a little more detail.
• 12:05
  SPEAKER_02: Um, but just remember it's not an accounting classification.
• 12:09
  SPEAKER_02: It's you're looking at the economics of the instrument when you're doing that host contract evaluation.
• 12:15
  SPEAKER_02: And so once you've once you've determined the nature of the host contract, then you assess whether those embedded features that we're talking about require bifurcation and need to need to be marked to market as driven instruments separately.
• 12:27
  SPEAKER_02: This is all a complicated assessment, right?
• 12:30
  SPEAKER_02: So companies issuing for the first time, you're like, where do I start?
• 12:33
  SPEAKER_02: And I think it's important to start with the right documents in front of you.
• 12:37
  SPEAKER_02: So if you're doing one of these analyses, uh, start with the preferred stock agreement.
• 12:42
  SPEAKER_02: It's called the stock purchase agreement sometimes.
• 12:45
  SPEAKER_02: Uh, but if the company is private, it's often helpful to have their formation agreements too.
• 12:50
  SPEAKER_02: Think of like an LLC or an LP agreement.
• 12:53
  SPEAKER_02: Importantly, it's also important to ask for any side letters that the company have entered into with investors.
• 12:59
  SPEAKER_02: Sometimes some of these features we talk about are documented in the preferred shares themselves, but they're documented in a side letter with a particular investor.
• 13:08
  SPEAKER_02: So actually different investors could have different side letters and that need to be evaluated separately.
• 13:14
  SPEAKER_02: So um, you know, it's it's important to look at all the documents that are going to have any of these important terms uh or agreements in them.
• 13:22
  SPEAKER_00: I mean, I might add, Brett, that um a lot of preferred stock are issued to employees or or things like that, right?
• 13:29
  SPEAKER_00: So employment agreements could be another document that you need to think about um as far as potentially having terms.
• 13:35
  SPEAKER_02: Great point.
• 13:35
  SPEAKER_03: Yeah, so it definitely makes sense.
• 13:37
  SPEAKER_03: You have to sort of look for all these agreements.
• 13:39
  SPEAKER_03: And I also think just it's almost a reminder of the complication of this area, the fact that you've concluded it's not debt.
• 13:46
  SPEAKER_03: And yet, Brett, to your point, it could be a debt host.
• 13:49
  SPEAKER_03: And I think that's where people this starts to get confusing to them to kind of if just as you walk through.
• 13:56
  SPEAKER_03: And so it is important, make sure you all have all the agreements, but then also make sure you sort of follow the accounting models in the right order and just take a step-by-step because otherwise you're just gonna confuse yourself, basically.
• 14:10
  SPEAKER_02: Our guide in this area has a lot of flow charts.
• 14:12
  SPEAKER_03: Like think about I was thinking about those flow charts.
• 14:14
  SPEAKER_02: Just like we did.
• 14:15
  SPEAKER_02: Like we know, think about liability first, and then think about your you know, equity or mezzanine.
• 14:20
  SPEAKER_02: And then once you're through there, think about measurement, and you're gonna think about host contract, and then you're gonna think about bifurcated features.
• 14:27
  SPEAKER_02: So it defin definitely does help to you know follow those kind of flowcharts.
• 14:31
  SPEAKER_03: So as we're thinking about those flow charts then and kind of walking things through, what is, Chris?
• 14:36
  SPEAKER_03: I'll go back to you sort of this first step of determining uh the classification.
• 14:42
  SPEAKER_00: Yeah, so you mentioned it before, Heather.
• 14:44
  SPEAKER_00: The first step is thinking about if it's actually recorded as a liability.
• 14:49
  SPEAKER_00: Um, and you know, specifically under the the accounting codification guidance, it's in uh section ASC 480.
• 14:56
  SPEAKER_00: And it gives, you know, two or three different types of instruments that are in between equity and debt, you know, not issued in the form of debt, but issued in the form of equity or a contract that is issued in the form of equity.
• 15:08
  SPEAKER_00: Um, and it says if the it kind of meets these criteria, it gets recorded as a liability.
• 15:13
  SPEAKER_00: Um when you're talking about preferred stock itself, like actual shares of preferred stock, there's usually two basic areas within that guidance that it could fall under.
• 15:22
  SPEAKER_00: Uh, one is mandatorily redeemable, and that's it's a bit of a mouthful.
• 15:27
  SPEAKER_00: But you know, basically it means you know, if it is kind of certain that there is a redemption that's going to occur.
• 15:34
  SPEAKER_00: So one example could be preferred stock that will be redeemed for cash or other assets in five years.
• 15:40
  SPEAKER_00: It sounds more like a debt instrument because it probably is closer to a debt instrument than the equity.
• 15:46
  SPEAKER_00: And so the the FASBI has said that's a liability, record that as a liability.
• 15:51
  SPEAKER_00: Similar to that, also under this category of mandatorily or redeemable, could be an event certain redemption.
• 15:58
  SPEAKER_00: So preferred stock perhaps issued to uh a key employee that um gets redeemed upon termination of that person's employment, or sometimes as morbid as it may sound, death of that person would require a redemption.
• 16:12
  SPEAKER_00: Like that, unfortunately, is an event certain to occur, right?
• 16:16
  SPEAKER_00: At some point someone will leave a company, at some point.
• 16:19
  SPEAKER_03: So the fact then in this case you don't know when it occurs is not impact that counting.
• 16:25
  SPEAKER_00: Well, it may impact the measurement of it, but it doesn't impact the classification.
• 16:29
  SPEAKER_03: All right.
• 16:29
  SPEAKER_03: This is an important point then to point out.
• 16:31
  SPEAKER_03: All right.
• 16:32
  SPEAKER_03: Right.
• 16:32
  SPEAKER_00: So there's a second kind of feature or or or instrument that will uh, if you will, under this guidance, and that that is um preferred stock that could be settled in a variable number of shares, common shares, right?
• 16:46
  SPEAKER_00: So, you know, think about um similar to what we just said, where a preferred stock is mandatorily convertible in five years, but it's based on a fixed dollar amount.
• 16:57
  SPEAKER_00: So it's say it's a million dollars divided by the price of the common stock on the day of mandatory conversion, and so you get a variable number of shares.
• 17:06
  SPEAKER_00: What the guidance says, if it's based predominantly upon a a fixed dollar amount, then it is similar to being redeemed, um, like for cash or or some other asset.
• 17:17
  SPEAKER_03: Oh, so the fact that it is redeemed in stock is not the important or equity is not the important point because you know the value of what you're getting is the key point there.
• 17:27
  SPEAKER_00: Trevor Burrus, Jr.
• 17:27
  SPEAKER_00: Exactly.
• 17:28
  SPEAKER_00: So it's kind of similar to if you may be familiar with stock-settled debt, right?
• 17:32
  SPEAKER_00: And it's kind of the same concept is you you're getting a fixed amount.
• 17:36
  SPEAKER_00: Um, it just the fact that it's being paid in in variable shares doesn't matter, doesn't make it equity at that point in time, because it's like settling uh a liability for a variable number of shares.
• 17:47
  SPEAKER_03: Aaron Powell So then if we conclude that this preferred stock is a liability within the scope of 480, uh then what is the initial measurement?
• 17:57
  SPEAKER_00: So the initial measurement, uh I think in in any case, really, with the preferred stock issuance, the initial measurement would be the fair value, which is usually going to be the proceeds paid by the investor, but there could be times when it's like in a multiple um transaction or something like that.
• 18:11
  SPEAKER_00: You kind of have to allocate, but it should be recorded at fair value.
• 18:14
  SPEAKER_03: All right, that's helpful.
• 18:15
  SPEAKER_03: And then let's assume.
• 18:16
  SPEAKER_03: So now I'm going down my flow chart, I can visualize it, and I've concluded, okay, I am this is not liability.
• 18:24
  SPEAKER_03: So then I think I know the answer here, but then does it just get recorded in equity?
• 18:30
  SPEAKER_00: Um I'm gonna give you a definite maybe on that one.
• 18:33
  SPEAKER_03: All right, actually, that's the count's favorite answer.
• 18:36
  SPEAKER_00: So uh uh you and Brett were talking a little bit about the mezzanine classification, right?
• 18:40
  SPEAKER_00: So there's kind of this subset, if you will, between actual liabilities and actual equity.
• 18:48
  SPEAKER_00: Um, you know, we call that permanent equity.
• 18:50
  SPEAKER_00: That is this mezzanine equity.
• 18:52
  SPEAKER_00: And it's things that aren't quite a liability, but there is some kind of called contingent redemption or or optionality uh behind the redemption.
• 19:02
  SPEAKER_00: So it's not mandatory, right?
• 19:04
  SPEAKER_00: So it's not you know clear cut that it's a liability, but there are potentials for this to get redeemed, and so that would generally wind up in this mezzanine classification.
• 19:14
  SPEAKER_00: But I don't want to go too deep into it because I know you mentioned you have another Yes.
• 19:17
  SPEAKER_03: I'll talk to I'm gonna talk to Chip about that.
• 19:19
  SPEAKER_03: Although it does, it is interesting when you describe it that way.
• 19:22
  SPEAKER_03: It's almost like you can't quite make up your mind.
• 19:24
  SPEAKER_03: So let's just go to the middle in between those two.
• 19:27
  SPEAKER_03: But anyway, so keep going though, if at least to give a quick preview so we can um keep going with our discussion today if you do wind up in this mezzanine.
• 19:38
  SPEAKER_00: Yeah.
• 19:38
  SPEAKER_00: So I mean, similarly, you know, when you initially measure it, it would be at fair value.
• 19:42
  SPEAKER_00: And then depending upon whether it's actually redeemable or it's probable to become redeemable, you there may be subsequent measurement um to kind of remeasure at either the redemption amount or what the redemption amount you know could be in the future.
• 19:58
  SPEAKER_00: Like sometimes it's redeemable in five years, you might accrete to that number over the five years.
• 20:03
  SPEAKER_00: Sometimes it's redeemable today, and sometimes it's contingently redeemable, and you're not sure if that's gonna happen.
• 20:08
  SPEAKER_00: And so if you think it's probable it will, you you may start you know accreting or recording to that redemption value today.
• 20:14
  SPEAKER_00: But if not, you may do nothing at this point and kind of wait and see if it does become probable of being redeemable.
• 20:20
  SPEAKER_03: So you mentioned though that this guidance for mezzanine is uh SEC guidance.
• 20:26
  SPEAKER_03: So do we see private companies following that too, or what's our view then for private companies?
• 20:31
  SPEAKER_00: Yeah, so I mean, I I would say definitely if you're a private company but you have intentions to go public, um it you should probably be following that guidance now because at the time that you would go public, you would have to, right?
• 20:43
  SPEAKER_00: And sometimes it gets harder to kind of have to go back and and redo the accounting uh under this model, right?
• 20:49
  SPEAKER_00: So so definitely if you if you're planning on going public, um, start following the model.
• 20:54
  SPEAKER_00: Um absent that, I you know, we I think we would say it's generally a good idea to follow, you follow this, um, you know, especially if that equity is not you know very clear that it will be permanent um you know for the company, right?
• 21:06
  SPEAKER_00: So so it makes a lot of sense to follow that.
• 21:08
  SPEAKER_00: And we would definitely encourage private companies to follow that guidance.
• 21:11
  SPEAKER_03: Yeah, it always seems like if there is a model, then it's better to follow the model than just to make up your own accounting.
• 21:17
  SPEAKER_03: So with that said then, let's presume I keep going down my flowchart and I've said it's not an ASC480 liability, and we don't have to present it as mezzanine, then it becomes part of this quote permanent equity.
• 21:30
  SPEAKER_00: Well, eventually you were gonna run out of other places to put it, right?
• 21:33
  SPEAKER_00: So eventually it's gonna wind up in permanent equity.
• 21:35
  SPEAKER_00: Okay, fair enough.
• 21:36
  SPEAKER_03: It's not an asset.
• 21:36
  SPEAKER_00: So it's not an asset, correct.
• 21:39
  SPEAKER_03: All right.
• 21:39
  SPEAKER_03: So then we talked about this more basic model for the or the model for the more basic preferred, but Brad, going back to you and the discussion of bifurcation, which I feel like is a word any non derivative expert does not like to hear.
• 21:53
  SPEAKER_03: But let's assume you're you have to consider this potential bifurcation, assessment of the host contract, et cetera.
• 22:00
  SPEAKER_03: Where would you start with that?
• 22:02
  SPEAKER_02: Yeah.
• 22:02
  SPEAKER_02: So as I said before, the assessment is not based on the legal form.
• 22:06
  SPEAKER_02: So don't don't start with that.
• 22:09
  SPEAKER_02: It's just a different analysis than than both legal form and the accounting classification.
• 22:15
  SPEAKER_02: And to level set what a host contract is, is think about it as the instrument that would have been issued were it not for these embedded components.
• 22:24
  SPEAKER_02: So it's the hybrid instrument that was issued without these embedded components.
• 22:29
  SPEAKER_02: And there's a little bit of a chicken or the egg in figuring out what's an embedded component versus what is the what's a host instrument.
• 22:39
  SPEAKER_02: Maybe this is a little more clear with some examples.
• 22:41
  SPEAKER_02: And I think sometimes the nature of the host contract is actually pretty straightforward.
• 22:45
  SPEAKER_02: For example, you can have a hybrid instrument that's legally a debt instrument that's going to have a debt host.
• 22:52
  SPEAKER_02: But where we run into complications is where it's an equity instrument, like we have in preferred shares, where the host assessment requires a lot of judgment.
• 23:02
  SPEAKER_02: You need to think about all the substantive terms and the implied terms in considering it.
• 23:07
  SPEAKER_02: You're going to look at things like redemption features, conversion options, dividend rights, voting rights, all the things that Chris talked about, collateral requirements, liquidation preference, and creditor rights, you know, just to name a few.
• 23:20
  SPEAKER_02: But you're trying to figure out, you know, what the nature of the core instrument is.
• 23:25
  SPEAKER_02: And it's not a check the box exercise.
• 23:28
  SPEAKER_02: Like I just listed a bunch of factors, and you could see people, well, I'm going to make the list.
• 23:32
  SPEAKER_02: And I've got three check marks over here, and I got two check marks over here.
• 23:37
  SPEAKER_02: I think it's a little more complicated than just looking at the existence of those features.
• 23:42
  SPEAKER_02: Um, and you'll have to weigh them.
• 23:44
  SPEAKER_02: So part of the weighing exercises is thinking about the most likely economic outcome or the most likely economic or exit scenario for the company.
• 23:53
  SPEAKER_02: So, for example, think if you have a preferred stock that has a contingent redemption feature tied to the occurrence of a deemed liquidation, but it also has a conversion option tied to an IPO.
• 24:07
  SPEAKER_02: You know, when the company's weighing the impact of that, they're going to assess the likelihood of an IPO versus the occurrence of a deemed liquidation.
• 24:15
  SPEAKER_02: If they think the IPO is highly likely, they're going to look at those equity features as the core host.
• 24:22
  SPEAKER_03: So, Brett, one question before we go on.
• 24:24
  SPEAKER_03: In the example you just gave, your assessment of the likelihood of the IPO is changing over time.
• 24:32
  SPEAKER_03: But for this particular determination of what is the host, you are not reassessing that after the first, uh after you first enter into the contract.
• 24:41
  SPEAKER_02: That's right.
• 24:42
  SPEAKER_02: You you assess it at issuance, and then your your weighting may, like you said, evolve over time.
• 24:48
  SPEAKER_02: You may be proved to be right or wrong.
• 24:50
  SPEAKER_02: It's a one-time assessment.
• 24:52
  SPEAKER_03: So, Brad, I think that's really helpful because this can be very judgmental.
• 24:57
  SPEAKER_03: And trying to figure out then exactly what is the host can be more complicated depending on the number of features that you have.
• 25:05
  SPEAKER_02: I I think that's right.
• 25:06
  SPEAKER_02: It's a it's an area where if this is your first time assessing it, you probably want some help with some experienced folks.
• 25:13
  SPEAKER_02: I think we get probably get more consults on this host identification than we do on classification, just because of what as we walk through how judgmental it can be.
• 25:23
  SPEAKER_03: Yeah, well, I think even we I said it earlier, this is a very popular section of the guide, but then sometimes having a person to talk to can be quite helpful.
• 25:32
  SPEAKER_03: So definitely encourage.
• 25:33
  SPEAKER_00: Uh, maybe to give a little perspective, right?
• 25:35
  SPEAKER_00: I think when we talk about it, we talk about it within a spectrum of all the instruments, there's probably 10% of the instruments are all the way on one side, which is very clear equity.
• 25:44
  SPEAKER_00: 10% of the instruments are all the way on the other side, which is very clear debt, and then 80% are in this gray maybe zone.
• 25:49
  SPEAKER_03: Yeah, that's actually very helpful perspective and why it might be helpful to ask questions of people like you and and Fred.
• 25:57
  SPEAKER_03: So if we kind of navigate through all of this and we have figured out then, do we have a debt host or an equity host?
• 26:04
  SPEAKER_03: Then, Chris, how does that impact the rest of the accounting?
• 26:08
  SPEAKER_03: So let's we're gonna bypass all that complicated and just come now.
• 26:11
  SPEAKER_03: We have an answer.
• 26:12
  SPEAKER_03: Debt equity.
• 26:13
  SPEAKER_03: What do we do next?
• 26:14
  SPEAKER_00: Well, gee, when you're getting to bifurcating embedded derivatives, I'm not sure that's the simple part of anything, right?
• 26:20
  SPEAKER_00: But yeah, so I mean, with all these different features that you know we've been talking about, right?
• 26:25
  SPEAKER_00: These, you know, are potential features that if you look at the derivative guidance, you know, the guidance would tell you if there are things embedded within a contract that are otherwise a derivative, you may have to separate that from the contract, right?
• 26:37
  SPEAKER_00: And there's maybe two or three criteria for for doing that.
• 26:40
  SPEAKER_00: You know, does this feature actually meet the definition of a derivative?
• 26:45
  SPEAKER_00: If it does, is there a related scope exception um for that?
• 26:50
  SPEAKER_00: And oftentimes when we talk about scope exceptions within you know equity like preferred stock, it's usually gonna be you know own equity um scope exception, which is 815-40.
• 27:00
  SPEAKER_00: But that's a whole other you know, episode, I'm sure, in and of itself.
• 27:04
  SPEAKER_00: So I don't really want to get into get into that, but that's usually gonna be an important thing to understand as well when you're talking about like the conversion options and such.
• 27:12
  SPEAKER_00: Um, but you know, so if you do have a derivative and it does not meet a scope exception, the third criteria is whether it's clearly and closely related to the host contract.
• 27:22
  SPEAKER_00: Um, because if it is clearly and closely related, it doesn't matter.
• 27:25
  SPEAKER_00: You don't have to bifurcate it.
• 27:26
  SPEAKER_00: But if it's not, and it like I said, it meets the definition of a derivative, um then you would have to bifurcate it.
• 27:32
  SPEAKER_00: And so that's why it's very important to understand, you know, what do I have economically as my host contract?
• 27:38
  SPEAKER_00: Is it debt or is it equity?
• 27:40
  SPEAKER_00: Because sometimes these definitions and the scope exceptions that we were just talking about can get very complicated.
• 27:45
  SPEAKER_00: So if you can kind of get to whether or not it's clearly closely related first, you may be able to kind of bypass all that, you know, because if you can't say it is clearly closely related, it doesn't matter if it's a derivative or not.
• 27:56
  SPEAKER_03: Yeah, although sometimes clearly and closely related is not the easiest.
• 28:00
  SPEAKER_00: Well, but it goes back to your your complexities around the host contract.
• 28:03
  SPEAKER_03: Exactly.
• 28:03
  SPEAKER_03: So with all of that said then, I think um we keep saying it's complicated, but so maybe we can go through an example that hopefully at least will illustrate some of this.
• 28:11
  SPEAKER_00: Uh yeah, sure.
• 28:12
  SPEAKER_00: So let's say that um you conclude that the preferred stock host contract is is an equity host, right?
• 28:20
  SPEAKER_00: Um so you look at at the uh the equity host and you have you know perhaps one of these um put features that we were talking about.
• 28:27
  SPEAKER_00: So the investor has the ability to put the preferred stock back to the company for cash or other assets.
• 28:34
  SPEAKER_00: And so that you know, may sound very much like a maturity, like like a debt, right?
• 28:39
  SPEAKER_00: So that is a debt-like economic feature within an equity host contract.
• 28:45
  SPEAKER_00: And so if that put would meet the definition of a derivative, um then you would say that's not clearly and closely related to an equity host, and you'd have to bifurcate it.
• 28:54
  SPEAKER_00: On the other hand, if you had concluded that that host preferred stock was more akin to a debt host, then it could be clear and closer related.
• 29:02
  SPEAKER_00: I mean, there are some specific guidance around how to measure clearly and close related when it comes to you know puts, especially if there are significant premiums or discounts, or you know, the the put feature is is kind of leveraged up in a way that may not necessarily be clear and close related, but I would say for the vast majority um of you know puts for these, they probably are clearly and close related.
• 29:25
  SPEAKER_00: On the other hand, you know, you you we talked about conversion options and kind of the flip-flop occurs, right?
• 29:30
  SPEAKER_00: So if I have an equity host preferred stock and I have a conversion right, um, that's truly an equity conversion, right?
• 29:38
  SPEAKER_00: Um we would say that that's clearly close related.
• 29:40
  SPEAKER_00: So even if it meets the definition definition of a derivative, you wouldn't have to bifurcate.
• 29:46
  SPEAKER_00: However, um, you know, conversion you know is equity-like features.
• 29:50
  SPEAKER_00: So if you had a debt host on on the preferred stock then and it doesn't you know meet the scope exception that we mentioned before, um you would have to bifurcate at that point.
• 29:58
  SPEAKER_03: All right, so definitely goes back to understanding not just the agreements but the economics of these contracts to really understand how these pieces will fit.
• 30:06
  SPEAKER_03: And I think then the other key point here is that if you do conclude it is a derivative, uh, or that it would meet the definition of a derivative, then it would need to be bifurcated and measured at fair value.
• 30:18
  SPEAKER_03: Aaron Powell Yeah.
• 30:19
  SPEAKER_00: So at that point it would be like any other derivative.
• 30:21
  SPEAKER_00: So it gets marked to market um through the through PL and um gets fair valued.
• 30:26
  SPEAKER_03: And then I guess one thing just to make sure, so then what's left, what do you do with the host that's left?
• 30:32
  SPEAKER_03: So you bifurcate, you take out the derivative portion, so then what happens to the host portion?
• 30:37
  SPEAKER_00: Well that goes back to kind of depending.
• 30:39
  SPEAKER_00: So you know if it was kind of in permanent equity, otherwise, there's nothing really that you do with the host after the initial um recording.
• 30:46
  SPEAKER_00: Um if it's in this mezzanine that's a good thing.
• 30:48
  SPEAKER_00: Oh, then you follow the model.
• 30:49
  SPEAKER_03: So it's kind of have to go back around basically once you reach this conclusion to figure out the accounting for that.
• 30:54
  SPEAKER_03: All right, that's helpful.
• 30:56
  SPEAKER_03: So then we talked about the accounting for the instrument itself, but I know um dividends are often a feature of these preferreds.
• 31:04
  SPEAKER_03: So then, Brett, coming back to you, how should we be thinking about these dividends and the accounting, especially because Chris, I believe, had mentioned earlier, we can see also these two different types of dividends.
• 31:15
  SPEAKER_02: Yeah, I think um the the key here is dividends on preferred stock come in a variety of flavors, and that's gonna change your accounting uh slightly.
• 31:24
  SPEAKER_02: You can have a stated or a fixed rate on them, they can be cumulative or non-cumulative.
• 31:29
  SPEAKER_02: Um, you could have rights to these discretionary dividends or participate in dividends alongside common stockholders.
• 31:37
  SPEAKER_02: So the accounting treatment for them is gonna depend on what we're talking about.
• 31:42
  SPEAKER_02: In general, periodic dividends um are recorded when they're declared by the board of directors because the declaration by the board creates a liability for the company.
• 31:52
  SPEAKER_02: In some cases, we see that the agreement, the preferred share agreement itself, legally obligates the company to pay dividends, even without a formal board declaration.
• 32:04
  SPEAKER_02: If that's the case, then the dividends should be accrued whenever they're earned under the contract.
• 32:10
  SPEAKER_02: In some cases, these dividends are cumulative.
• 32:12
  SPEAKER_02: Chris talked about this, where even if a cash dividend isn't paid in a certain period, it accrues to the holder over time and is paid at some future date, you know, maybe upon liquidation or redemption.
• 32:24
  SPEAKER_02: And here I think there's a couple things to think about.
• 32:27
  SPEAKER_02: First, um, that cumulative dividend could impact the liquidation preference or the redemption value of the preferred shares.
• 32:35
  SPEAKER_02: So when you're thinking about mezzanine classified uh instruments that may be recorded at their redemption value, it could affect that redemption value.
• 32:46
  SPEAKER_02: Um so keep in mind if you've got mezzanine classified preferred stock with that cumulative feature.
• 32:51
  SPEAKER_02: The other reminder is that um, even though it if you've got a cumulative feature, um, if the board didn't declare a dividend, in most cases, EPS computations should still reflect accrued but undeclared dividends on these cumulative preferred shares.
• 33:07
  SPEAKER_02: So jump ahead to all of the EPS podcasts that we talked about.
• 33:11
  SPEAKER_02: Yes.
• 33:12
  SPEAKER_02: Um the other thing I'd mention is when preferred shares participate with common, um, Chris mentioned this earlier, you may need to apply the two-class method of computing basic EPS.
• 33:23
  SPEAKER_02: And so I won't get into those details there, but I think it's an important consideration to make when you're talking about these preferred dividends, is not just to think about your balance sheet income statement, but what it's going to mean to EPS.
• 33:35
  SPEAKER_03: All right.
• 33:35
  SPEAKER_03: So definitely, again, a lot of pieces to think about.
• 33:38
  SPEAKER_03: And we we will include links to those other EPS podcasts in the show notes because that is a whole other topic.
• 33:44
  SPEAKER_03: Um, so that then would take me to our last topic, which is all right, we're talking about day one accounting, subsequent accounting, but now talking about extinguishment or modification accounting.
• 33:56
  SPEAKER_03: What are some of the things then, Chris, we would think about when we're dealing with preferred stock?
• 34:00
  SPEAKER_00: Yeah.
• 34:00
  SPEAKER_00: So, you know, what's interesting is that, you know, preferred stock in and of itself sometimes could have very well-defined cash flows, as we've been talking about.
• 34:09
  SPEAKER_00: Maybe that's more like the debt type features we've been talking about, um, or it may not involve very detailed or defined cash flows.
• 34:17
  SPEAKER_00: So it makes the analysis of modification versus extinguishment a little bit complex.
• 34:23
  SPEAKER_00: Um maybe that's the theme for today, right?
• 34:25
  SPEAKER_00: There's a lot of things that seem simple but are very complex, right?
• 34:29
  SPEAKER_00: Um, and you could have changes in the terms that could have a significant impact on the fair value of the preferred stock, but again, it doesn't really impact the defined cash flows per se.
• 34:40
  SPEAKER_00: It could be a you know modifying or or introducing a conversion option that wasn't there before.
• 34:46
  SPEAKER_00: Um it could be, you know, changes in the liquidation preference amounts and things like that, right?
• 34:51
  SPEAKER_00: So yeah, again, it could have an impact on the fair value, but really not um on the cash flows.
• 34:57
  SPEAKER_00: And unfortunately, there really is no defined model or or guidance within codification on how to think about modifications versus extinguishments for preferred stock.
• 35:09
  SPEAKER_00: There is an SEC speech um that uh people generally look to, um, but that's not codified within the within the guidance.
• 35:17
  SPEAKER_00: So as far as like what the model you know could be, or or what the SEC speech kind of laid out what a model should be, um there's probably like two or three different uh ways of going about thinking about it.
• 35:28
  SPEAKER_00: Generally speaking, you start off with like a qualitative or a quantitative assessment.
• 35:34
  SPEAKER_00: And and qualitative could be well, gee, the the changes are just so clearly inconsequential that clearly is not extinguishing the old instrument.
• 35:43
  SPEAKER_00: It's just simply a uh a minor modification.
• 35:46
  SPEAKER_00: That's just usually going to be more things like like administrative type changes to the document.
• 35:52
  SPEAKER_00: On the other hand, there could be changes that are so clearly significant, like I just said, maybe introducing uh a significant or substantial conversion option that wasn't there before.
• 36:04
  SPEAKER_00: Um like that clearly, you know, is something that is a very big change to what I had.
• 36:09
  SPEAKER_00: So that would say it's really not kind of the continuation of what I had.
• 36:13
  SPEAKER_00: It's really a new instrument that's being issued, and so that would say I should extinguish the old and and put on this new instrument.
• 36:20
  SPEAKER_00: Um but not everything's gonna be that black and white, right?
• 36:22
  SPEAKER_00: It's not gonna be that that clear cut that it's very inconsequential or that it's very significant.
• 36:27
  SPEAKER_00: And so the next step is if I can't really qualitatively say it's it's clearly one or the other, I have to have some sort of a quantitative analysis.
• 36:35
  SPEAKER_00: You know, one approach could be very similar to the debt model, which is you know, kind of look at the change in the cash flows, and if there's a 10% or greater change uh in the present value, um, then I would uh call that uh an extinguishment.
• 36:52
  SPEAKER_00: If it's less than 10%, I would call that a modification.
• 36:55
  SPEAKER_00: So if I have these preferred instruments that kind of behave a lot more like debt, has a you know fix stated interest rate, perhaps uh, you know, um well, not a mandatory redemption date, because that would be a liability, as we talked about before, but something similar to that, you know, where it's gonna kind of clearly be put, you know, there may not be a conversion in there.
• 37:15
  SPEAKER_00: So you can really see the ultimate takeout as likely gonna be some kind of put.
• 37:19
  SPEAKER_00: You can kind of use that and kind of define the cash flows and do a model very similar to the debt.
• 37:24
  SPEAKER_00: Um, on the other hand, you know, instruments that don't have that kind of very well-defined set of cash flows, um, you may look at the change as on a fair value basis.
• 37:33
  SPEAKER_00: Um, so a little bit similar to the guidance that's in stock compensation, right?
• 37:37
  SPEAKER_00: And so you look at, you know, what was the fair value before the change, what was the fair value after the change, what's that difference in the fair value, and measure that as a percentage uh of the original contract or the fair value.
• 37:51
  SPEAKER_00: So a 10% or greater change based on the change in fair value would lead you to say I kind of have a new instrument, and so therefore I've extinguished the old and something less than 10% would say that's more of just a continuation, it's a modification because the changes were minor.
• 38:05
  SPEAKER_03: Aaron Powell So then you mentioned that these uh this guidance is not codified, but in practice, is it pretty well accepted?
• 38:13
  SPEAKER_03: These are the approaches that people would take in dealing with these types of changes.
• 38:19
  SPEAKER_00: Aaron Powell Yeah, I mean partly I think it makes a lot of sense.
• 38:21
  SPEAKER_00: Well, me too.
• 38:22
  SPEAKER_00: That's why I was curious.
• 38:23
  SPEAKER_03: I mean, it seems very logical when you laid it out that way.
• 38:26
  SPEAKER_00: So I mean, one thing I should mention is, you know, it's it's not really a legal instrument assessment.
• 38:31
  SPEAKER_00: I think maybe years ago, some folks would think, you know, if I kind of legally extinguished or legal, legally simply modified, I would follow that.
• 38:39
  SPEAKER_00: But I I think that's kind of no longer the in-vogue way of thinking of it.
• 38:43
  SPEAKER_03: In vogue, all right.
• 38:44
  SPEAKER_03: I never knew we'd be using that terminology talking about accounting, but impressive.
• 38:49
  SPEAKER_02: And obviously, like Chris laid out a pretty clear framework.
• 38:51
  SPEAKER_02: Yes.
• 38:52
  SPEAKER_02: You know, right?
• 38:52
  SPEAKER_02: Oh, if it has cash flow, defined cash flows, use this model.
• 38:56
  SPEAKER_02: Like applying that in practice can be can be difficult.
• 39:00
  SPEAKER_02: Because obviously, as we've talked about, everything here is not all one thing or another.
• 39:05
  SPEAKER_03: Right, right.
• 39:05
  SPEAKER_03: But it is helpful though, at least to have sort of this framework that does seem very logical.
• 39:10
  SPEAKER_03: So assuming you make it again through another judgment, which now I should have been keeping track how many uh we've talked about today, then what is the counting, depending if it's extinguishment or modification?
• 39:21
  SPEAKER_00: Yeah, so maybe it's we'll start with extinguishment.
• 39:24
  SPEAKER_00: That maybe is a little clearer, right?
• 39:26
  SPEAKER_00: So I kind of in an extinguishment model, I am de-recognizing the old instrument and I'm recognizing the new instrument or whatever consideration was given in the extinguishment.
• 39:37
  SPEAKER_00: Um so sometimes it could be cash, it could be other assets, or it's usually just simply a new, um, a new preferred stock instrument.
• 39:44
  SPEAKER_00: I would measure uh a gain or loss, no, not a penile gain or loss yet.
• 39:48
  SPEAKER_00: So so I'll use that term a little loosely, but I measure a gain and loss as a difference between the consideration being paid, so the fair value of the new instrument, you know, and or cash or whatever is being given up uh as the difference between that and what the carrying value of the old instrument was.
• 40:05
  SPEAKER_00: That gain or loss doesn't really go through the the income statement, but what that does is get recorded as like a deemed dividend in retained earnings.
• 40:14
  SPEAKER_03: All right.
• 40:14
  SPEAKER_03: And then how about if it's modification?
• 40:16
  SPEAKER_00: So it's a modification, it's a bit trickier, right?
• 40:19
  SPEAKER_00: Because you're not really taking the old off.
• 40:21
  SPEAKER_00: Uh and really what you need to do is think about did I transfer any value?
• 40:26
  SPEAKER_00: And usually it, you know, when we talk about that, it's a transfer between the common holders, common equity holders, and the preferred holders.
• 40:35
  SPEAKER_00: And if it's determined that there is a transfer of value between the two, uh, it would be a similar model that we just talked about.
• 40:42
  SPEAKER_00: It would be recorded as a deemed dividend uh within retained earnings.
• 40:46
  SPEAKER_00: But if it's determined that there really was no transfer of value, or maybe there was just simply you know transfer amongst preferred shareholders, then you may not record that deemed dividend.
• 40:54
  SPEAKER_03: All right.
• 40:55
  SPEAKER_03: So definitely a lot to think about.
• 40:57
  SPEAKER_03: And I do think we use the word judgment.
• 41:00
  SPEAKER_03: I should have been keeping a tally, but I feel like each step of this is complicated enough to practically be its own podcast.
• 41:07
  SPEAKER_03: So taking a big step back, maybe just drop things up.
• 41:10
  SPEAKER_03: I know you guys deal with a lot of questions on this topic.
• 41:13
  SPEAKER_03: Um, obviously are also helping write PwC's interpretive guidance and otherwise.
• 41:18
  SPEAKER_03: And so, what advice would you give to someone who's kind of encountering one of these, maybe for the first time, or even if they have dealt with it before, it's it's not like a weekly occurrence.
• 41:29
  SPEAKER_03: So, Chris, maybe I'll start with you on that.
• 41:32
  SPEAKER_00: Um well, I think Brett said it before we started really is making sure you fully understand everything that you're dealing with, right?
• 41:38
  SPEAKER_00: That that you've thoroughly looked at the contracts, whether that's the actual stock agreement itself, um, whether it's you know other side letters or or other types of agreements um that provide the terms.
• 41:50
  SPEAKER_00: Because the starting point really is making sure I understand everything that I have, because it could be very easy to overlook something.
• 41:57
  SPEAKER_03: All right, that's great advice, Brett.
• 41:59
  SPEAKER_02: Yeah, I I'd say keep organized and and work through that flow chart.
• 42:02
  SPEAKER_02: It's easy to jump ahead, you know, too.
• 42:05
  SPEAKER_03: That's what I was worrying about.
• 42:06
  SPEAKER_03: Yeah.
• 42:08
  SPEAKER_02: I think Chris's point around making sure you know what your what your all your agreements are is important because where we see, especially when you get into uh that bifurcation analysis, some of those things can that can be bifurcatable derivatives are fairly nuanced in the agreement.
• 42:23
  SPEAKER_02: So you really have to kind of know what you're looking for and and read these agreements and step through this whole analysis very methodically.
• 42:30
  SPEAKER_00: I might also add that our financing guide has a chapter dedicated to preferred stock.
• 42:35
  SPEAKER_00: I believe it's chapter seven uh in our financing guide.
• 42:38
  SPEAKER_00: And so we go through a lot of what we just talked about, maybe even a little bit more detail with some questions and answers on on some other features as well, uh, less common.
• 42:47
  SPEAKER_00: Um so that you know, that may be another place to, if you really want to do some reading, uh, you could check out our our guide in chapter seven.
• 42:54
  SPEAKER_03: Excellent advice and definitely a pleasure to talk to both of you today.
• 42:58
  SPEAKER_03: Thanks so much for joining me.
• 42:59
  SPEAKER_03: Thank you.
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  SPEAKER_03: From Thought Leadership at PwC, I'm Heather Horn.
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