James Lichau, Assurance Partner and Financial Services Co-leader, BPM LLP
Will Tanem, Partner and Technical Accounting Practice Leader, BPM LLP

In the past year, many fintech companies resorted to debt financing and/or debt modifications to extend their runways during challenging market conditions. BPM Partners James Lichau and Will Tanem flag some of the accounting complexities and risks that could arise from that decision — and how BPM can assist.

Fintech companies faced a challenging environment in 2023, ranging from lower equity valuations to quieter IPO and M&A markets. Fundraising in this environment was especially challenging, putting pressure on an industry that is often in search of capital to support innovation, scale and growth. Against this backdrop, fintech firms increasingly turned to debt to help bolster their runways, support operations and avoid equity down rounds related to worsening equity market conditions.

Raising the level of technical accounting requirements for Fintech companies

With traditional financial institutions being stricter on their lending policies, many looked to more creative debt solutions or non-traditional lenders like private equity firms. These types of transactions often raise the level of complexity on the accounting side — and those implications are critical to prepare for.

It’s important for any organization in this situation to understand the potential accounting and disclosure implications and reporting requirements. Furthermore, debt instruments issued in the current economic landscape tend to carry “hidden interest costs” in the form of sweeteners such as warrants, additional final payment amounts and disguised lender fees, to name a few. These debt features may require third-party valuation support for external reporting.

It is crucial that management understand the implications of these instruments. They may have profound non-cash impacts on the organization’s income statement. They may also lead to costly cash impacts in the form of increased compliance, accounting and valuation requirements.

Below, we highlight a few debt scenarios that we commonly come across in today’s economic environment that could raise the level of technical accounting requirements:

• Restructuring debt with existing lenders.
• Syndicated debt instruments.
• Issuing or modifying warrants.
• Modifying debt to extend the term, increase borrowing capacity or interest rate adjustments.
• Utilizing private equity funds, VCs or other alternative debt financing transactions.
• Issuing convertible debt with advantageous terms for the lender(s), such as inducements to convert or other embedded conversion features.

Preparing for a lower-rate environment

Once inflation begins tracking consistently in the right direction, the U.S. Federal Reserve is expected to start to lower interest rates. Timing on when that policy direction will take place is still up in the air, but most market participants expect this shift to start in 2024.

When rates do start trending lower, organizations with heavy reliance on debt financing in recent years may be incentivized to look for refinancing opportunities. That step will likely trigger some of the same accounting complexities mentioned above.

The bottom line is that preparation is key both from a short- and long-term perspective when it comes to the accounting implications of more complex debt financing transactions.

How BPM can help

When it comes to more complex scenarios around debt structuring, it’s best to turn to seasoned professionals to help navigate the technical accounting complexities that may arise. There can be a range of factors at play that could trigger accounting implications that will need to be surfaced when reporting to stakeholders or in any future audit situations.

BPM’s Technical Accounting Group (TAG) is a specialized professional service group of highly experienced and highly skilled professionals that assists executives with their most complex and significant accounting and compliance matters for clients in highly scrutinized environments, such as those leading up to an IPO or M&A activity.

TAG is here to assist and advise so you may focus on your business operations. We scale up with your company during spikes in operations related to complex accounting projects or periodic reporting, and we scale down when typical operations resume.

BPM’s technical accounting group goes beyond traditional compliance services to provide more in-depth accounting advisory offerings. Our technical accounting services include:

• Analyzing the accounting and reporting implications of business transactions.
• Accounting for complex debt and equity financing, modifications vs. extinguishments and derivatives.
• Preparing technical accounting memos.
• Preparing financial statements and drafting disclosures.
• And much more!

Contact us today to get started

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