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Convertible preferred stock converted to Common stock after IPO closing

JD Greenway's Profile

The Facts: - conversion of each share of Series A preferred stock (par value $0.001) into one share of common stock (par value $0.001) immediately prior to the completion of the IPO - Series A preferred stock warrants will be linked to the common stock after the conversion of Series A preferred stock to common stock - Series A preferred stock issuance price $25.00 - Common Stock price at IPO closing date $35.00 - Series A preferred stock are recorded as mezzanine due to redeemable features My first through is recording the conversion using the Book Value method and essentially moving the carrying value from Preferred to APIC less the small increase to the common par value. Are there other method used and what is the actual ASC guidance this would fall under? Thanks in advance

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Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

JD,

From my understanding of what you've written; yes.
What is confusing me is that preferreds are usually technically debt; the par value is typically what has been paid for the notes (equity bit being that they are convertible, but they're not equity until the conversion happens). So I'd expect to see the par be $25.
Granted, I've not seen everything.

Cheers,

KP

JD Greenway
Title: Manager
Company: ABC Management
(Manager, ABC Management) |

Thanks for your thoughts.

This was an interesting case as the Par value was so low, creating a large APIC preferred share balance.

The main thing I can't find for an accounting memo is the ASC guidance. I've searched ASC 480 and 505 but nothing relates to the specific issues. Therefore I've referred to common accounting text books as a reference to why the book value is the correct method to apply.

Unless there is something I'm missing in the ASCs

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

JD, you are correct - the carrying value of the preferred transfers over to the common that was issued upon conversion, and would have to be split between common stock (based on the par value as set forth in the Articles) and APIC.
You mention that the preferred as "mezzanine" - I assume you mean it was classified as a liability since the old presentation as mezzanine (between liabilities and equity) went away many years ago. This shouldn't affect the treatment of the conversion - just make sure you pick up all of the components of carrying value (which may include accrued and unpaid dividends, accretion of discounts if the issue price was less than the redemption value, etc.).

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