Complex Financial Instruments

It takes technical expertise and years of experience to value alternative investments.

Valuing complex financial instruments such as warrants and options when there are multiple classes of stock or fixed income securities with embedded derivatives is extremely complicated.

There are a significant number of assumptions and numerous types of financial models that can be used to determine the value of complex financial instruments. Selecting assumptions that are not congruent with a market participant's perspective or applying an inappropriate financial model may result in incorrect valuation conclusions. In addition, the tax consequences of arriving at the wrong value under Internal Revenue Code §409A punish the recipient.

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Without an actual transaction for that asset or liability, the objective of a fair value measurement is to estimate an exchange price for the asset or liability being measured. This analysis requires significant judgments and creates risks, including:

  1. Model risk (using an incorrect model or inputs)
  2. Liquidity risk (not considering the impact of liquidity relative to the valuation of the financial instrument)
  3. Accounting risk (not properly applying GAAP)

Accounting practices now require consideration of complex modeling techniques such as lattice models, multiple scenarios and/or simulations. The resulting valuation affects your financial statements and your company's and employees' bottom lines. And over time, depending on their initial valuation, complex financial instruments can become very costly if the proper factors weren't considered at the time of pricing.

Resource for audit and other valuation firms

Large audit firms, appraisers and companies issuing complex financial instruments regularly seek our expertise to help them arrive at a valuation that's compliant for both financial and tax purposes. And for good reason. We're on top of the latest technical guidance from accounting standard-setters, industry working groups and appraisal societies – and we provide valuation opinions that can instill confidence the investments are priced where they should be.

Valuing alternative investments requires experienced, knowledgeable professionals. Call RSM.