You have been hired as a staff accountant by a small company that recently completed an...

You have been hired as a staff accountant by a small company that recently completed an initial public offering (IPO) of its common stock. At its inception, the company had been financed by Pegasus, an investment group. Pegasus had bought a significant amount of the company’s debt (equal to a third of its total assets) in the form of convertible bonds. The stock price has appreciated significant since the IPO, and Pegasus has decided to convert its debt securities into equity, giving Pegasus a 28% stake in the company. Your CEO, Dane Hathaway, argues that this conversion should not be reported on the cash flow statement. “It didn’t involve any cash both way, and it’s not like the structure of our business has changed. We haven’t increased or changed our fixed assets, and we haven’t given anything up.”

Research the appropriate Codification and prepare a business memo explaining whether Dane's reasoning is correct and citing your references.

Expert Solution

The codification is 230-10-50-3 and 230-10-50-4

Non Cash Investing and Financing Activities

"Information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but do not result in cash receipts or cash payments in the period shall be disclosed. Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and non cash aspects of transactions involving similar item"

BUSINESS MEMO

TO: CEO DANE HATHAWAY

FROM: STAFF ACCOUNTANT MR.XYZ

DATE: JANUARY 29, 2018

SUBJECT: CASH FLOW DISCLOSURE REGARDING DEBT TO EQUITY CONVERSION

According to FASB codification all non cash financing activities have to be disclosed in cash flow if they affect assets or liabilities

The conversion debt to equity affects the liabilities of the company and thus have to be disclosed as mentioned in code 230-10-50-3 and 230-10-50-4 as always

Non Cash Investing and Financing Activities

"Information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but do not result in cash receipts or cash payments in the period shall be disclosed. Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and non cash aspects of transactions involving similar item"

References : FASB accounting standards codifications

Code: 230-10-50-3 and 230-10-50-4

ekkarill92 answered 2 years ago

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