Chapter 6 — Other Common Embedded Features

6.4 Call, Put, and Other Redemption Features in Debt Hosts

6.4.1 Background

Debt host contracts often contain features that could permit the issuer to call (or prepay) the outstanding amount or allow the holder to put (or accelerate the repayment of) the outstanding amount. Such contracts might also contain features that trigger an acceleration of the due date for the repayment of the instrument upon the occurrence or nonoccurrence of a specified event or events (e.g., an event of default or change of control). We discuss application issues related to such features embedded in equity host contracts in Section 6.5.

Connecting the Dots

Recently, we have seen an increase in debt instruments with features linked to environmental, social, and governance (ESG) factors. In such instruments, the due date may be accelerated, deferred, or triggered by the occurrence or nonoccurrence of a specified environmental event or events. For ESG-linked debt instruments with this type of feature, the determination of whether the feature requires bifurcation often depends on whether the redemption feature is clearly and closely related to the debt host under the four-step decision sequence in ASC 815-15-25-42, as discussed in Section 6.4.3.

6.4.2 Bifurcation Analysis

The table below presents an overview of the bifurcation analysis of redemption features embedded in a debt host contract. However, an entity should always consider the terms and conditions of a specific feature in light of all the relevant accounting guidance before reaching a conclusion.

Bifurcation Condition	Condition Met?	Analysis
Not clearly and closely related (see Section 4.3.2)	It depends	The debtor should evaluate whether the redemption feature is clearly and closely related to the debt host under the four-step decision sequence in ASC 815-15-25-41.
Hybrid instrument not measured at fair value through earnings on a recurring basis (see Section 4.3.3)	It depends	From the issuer’s perspective, debt is not measured at fair value on a recurring basis unless the issuer elects the fair value option in ASC 815-15 or ASC 825-10. The fair value option cannot be elected for debt that contains a separately recognized equity component at inception. In the case of an outstanding share that qualifies for equity presentation but was determined to have a debt host, the instrument would not be recorded at fair value through earnings on a recurring basis. From the holder’s perspective, the determination of whether the hybrid instrument is measured at fair value, with changes in fair value recorded through earnings, will depend on whether the instrument is (1) an equity method investment, (2) considered a debt security within the scope of ASC 320 (and whether the holder has elected to apply the fair value option), or an equity security within the scope of ASC 321.
Meets the definition of a derivative (see Section 4.3.4)	Yes	A redemption feature embedded in a debt host meets the definition of a derivative irrespective of whether the debt host contract is RCC.
Meets a scope exception (see Section 4.3.5)	No	There is no specific scope exception for redemption features embedded in a debt host.

As shown in the table above, the determination of whether a redemption feature must be bifurcated as a derivative tends to focus on whether the feature is considered clearly and closely related to the debt host contract (see the next section) unless the entity records the hybrid instrument at fair value, with changes in fair value recorded through earnings. Such features meet the definition of a derivative and are not exempt from the scope of derivative accounting.

6.4.3 Clearly-and-Closely-Related Analysis

ASC Master Glossary

Prepayable

Able to be settled by either party before its scheduled maturity.

ASC 815-15

25-41 Call (put) options that do not accelerate the repayment of principal on a debt instrument but instead require a cash settlement that is equal to the price of the option at the date of exercise would not be considered to be clearly and closely related to the debt instrument in which it is embedded.

25-42 The following four-step decision sequence shall be followed in determining whether call (put) options that can accelerate the settlement of debt instruments shall be considered to be clearly and closely related to the debt host contract:

Step 1: Is the amount paid upon settlement (also referred to as the payoff) adjusted based on changes in an index? If yes, continue to Step 2. If no, continue to Step 3.

Step 2: Is the payoff indexed to an underlying other than interest rates or credit risk? If yes, then that embedded feature is not clearly and closely related to the debt host contract and further analysis under Steps 3 and 4 is not required. If no, then that embedded feature shall be analyzed further under Steps 3 and 4.

Step 3: Does the debt involve a substantial premium or discount? If yes, continue to Step 4. If no, further analysis of the contract under paragraph 815-15-25-26 is required, if applicable.

Step 4: Does a contingently exercisable call (put) option accelerate the repayment of the contractual principal amount? If yes, the call (put) option is not clearly and closely related to the debt instrument. If not contingently exercisable, further analysis of the contract under paragraph 815-15-25-26 is required, if applicable.

ASC 815-15-25-41 and 25-42 address whether embedded call or put options are clearly and closely related to a debt host contract and apply to all features that can accelerate the settlement of a debt instrument regardless of (1) whether such acceleration is optional or mandatory and (2) how such features are described in the debt’s contractual terms. As shown in the decision tree below, ASC 815-15-25-42 identifies four steps that should be performed in the analysis of whether a feature that can accelerate the settlement of a debt instrument is clearly and closely related to a debt host contract.

In practice, a discount or premium that is 10 percent or more is considered “substantial” in the analysis performed under step 3. In determining whether a substantial premium or discount exists, an entity should compare the debt’s initial net carrying amount to the potential payoff if the embedded call, put, or other redemption feature is triggered. Accordingly, an entity should base its analysis on the amount allocated to the debt for accounting purposes rather than the total cash proceeds (e.g., if debt was issued with detachable warrants, the amount allocated to the warrants could cause a discount on the debt). Nevertheless, an entity should not consider a discount that results from one of the following in its determination of whether the debt involves a substantial discount or premium under ASC 815-15-25-42:

Third-party debt issuance costs that have been deducted from the initial carrying amount.
A discount that results from the separation of an embedded derivative under ASC 815-15.

An entity should consider the payoff of the embedded feature being analyzed in determining whether the debt instrument was issued at a substantial premium or discount. For example, if a debt instrument that was issued at par contains a put option that allows the investor to redeem the instrument at 112 percent of par value, the debt instrument would be considered to involve a substantial premium. Similarly, if a debt instrument was issued at 90 percent of par and is redeemable at par, the debt is considered to involve a substantial discount. However, unpaid accrued interest does not form part of the analysis of whether a substantial premium or discount exists.

Importantly, the debtor performs the tests as of the date on which it initially recognizes the debt and does not subsequently reassess the tests. The investor (or creditor) performs the tests as of the date it recognizes the debt investment regardless of whether it acquires the debt investment in a secondary market or upon initial issuance and would similarly not perform subsequent reassessment. Accordingly, it is possible that the investor’s application of the tests would have a different result than the initial evaluation performed by the debtor if the investor acquires the debt investment in a secondary market and the market conditions or terms at that time have changed from the time of initial issuance.

The following table outlines and illustrates the application of the four steps in ASC 815-15-25-42:

Steps	Examples of Terms That Would Result in a “Yes” Answer	Examples of Terms That Would Result in a “No” Answer
“Step 1: Is the amount paid upon settlement (also referred to as the payoff) adjusted based on changes in an index? If yes, continue to Step 2. If no, continue to Step 3.”	The principal amount is adjusted for changes in the price of gold. The principal amount is adjusted for changes in a stock market index. The principal amount is adjusted to reflect changes in inflation rates (e.g., CPI). The principal amount is adjusted on the basis of the issuer’s earnings or EBITDA.	The payoff is a fixed principal amount plus accrued interest. The payoff is a fixed principal amount plus a premium that decreases ratably as the instrument approaches maturity.
“Step 2: Is the payoff indexed to an underlying other than interest rates or credit risk? If yes, then that embedded feature is not clearly and closely related to the debt host contract and further analysis under Steps 3 and 4 is not required. If no, then that embedded feature shall be analyzed further under Steps 3 and 4.”	Commodity-linked payoff (see Section 6.8.3). Equity-linked payoff (see Section 6.2.2.4), such as debt that is callable by the issuer at par plus 5 percent of the change in S&P 500. Payoff linked to a credit risk exposure that is different from the borrower’s credit risk exposure (see Section 5.3.3).	Payoff directly linked to changes in the borrower’s credit rating (see Section 5.3.3). Nonleveraged inflation-indexed contracts where the inflation rate is in the economic environment for the currency in which the debt is denominated (see Section 5.4.3).
“Step 3: Does the debt involve a substantial premium or discount? If yes, continue to Step 4. If no, further analysis of the contract under paragraph 815-15-25-26 is required, if applicable” (see Section 5.2.3).	Fixed-rate debt issued at a 12 percent discount to par and contingently puttable at par. Fixed-rate debt issued at par that is contingently puttable for 110 percent of par.	Debt puttable at par issued at a 6 percent discount to par. Debt issued at a 3 percent discount to par that is callable upon an IPO at par plus accrued and unpaid interest.
“Step 4: Does a contingently exercisable call (put) option accelerate the repayment of the contractual principal amount? If yes, the call (put) option is not clearly and closely related to the debt instrument. If not contingently exercisable, further analysis of the contract under paragraph 815-15-25-26 is required, if applicable” (see Section 5.2.3).	Convertible debt with a redemption feature that permits the investor to put the debt if an IPO occurs. Debt with a redemption option that is exercisable by either the investor or the issuer upon a change in control. Debt with a redemption option that is exercisable upon a change in interest of at least 150 basis points.	The embedded option is exercisable at any time. The embedded option is exercisable at the anniversary date of the issuance of the debt.

As noted in steps 2, 3, and 4 of the decision sequence in ASC 815-15-25-42, an entity might be required to consider the applicability of ASC 815-15-25-26 to an embedded call, put, or other redemption feature. ASC 815-15-25-26 applies to embedded derivatives “in which the only underlying is an interest rate or interest rate index . . . that alters net interest payments that otherwise would be paid or received on an interest-bearing [debt] host contract” (see Section 5.2.3.1). An option that can be exercised only upon the occurrence or nonoccurrence of a specified event (e.g., an IPO or a change in control at the issuer) would always have a second underlying (the occurrence or nonoccurrence of the specified event). The existence of this second underlying would exclude such a contract from the scope of ASC 815-15-25-26 unless the event is solely related to interest rates (e.g., a call that may only be exercised when LIBOR is at or above 5 percent) because the underlying would never be only an interest rate or interest rate index (see Section 5.2.3.2).

Example 6-5

Debt That Is Puttable Upon a Change in Control

Entity A issues a 10-year note at par, which becomes puttable to the issuer at 102 percent of par plus accrued interest, if a change in control occurs at A.

As shown in the table below, A must apply the four-step decision sequence in ASC 815-15-25-42 to evaluate whether the embedded put option is clearly and closely related to the debt host.

Example	Indexed Payoff? (Steps 1 and 2)	Substantial Discount or Premium? (Step 3)	Contingently Exercisable? (Step 4)	Embedded Option Clearly and Closely Related?
Debt issued at par is puttable at 102 percent of par, plus accrued interest, in the event of a change in control at A.	No. The amount paid upon settlement is not “adjusted based on changes in an index.” The payoff amount is fixed at 102 percent of par, plus accrued interest.	No. The debt is issued at par and puttable for a premium that is not substantial.	N/A. Analysis is not required because the answer to step 3 is no (i.e., no substantial discount or premium).	Yes. The embedded put option is clearly and closely related to the debt host. ASC 815-15-25-26 does not apply because the change in control is considered a second underlying that is not an interest rate or an interest rate index.

Example 6-6

Interest Make-Whole Premium That Becomes Payable Upon Exercise of Call Option

Entity X has issued a debt security, which includes a call option that permits X to prepay the outstanding amount of principal and accrued interest at any time before the debt’s maturity. If X calls the debt security before its maturity date, it is required to also pay an interest make-whole premium equal to the present value of the debt’s remaining interest cash flows discounted at a fixed spread over the current U.S. Treasury rate as of the date on which the debt is settled. However, X could not be required to pay an interest make-whole premium in excess of 5 percent of the principal amount.

The interest make-whole premium is considered an integral component of the call option; it is not a distinct embedded feature that requires separate evaluation under ASC 815-15. When assessing whether the call option is clearly and closely related to its host, the issuer first should look to the four-step decision sequence in ASC 815-15-25-42.

Example	Indexed Payoff? (Steps 1 and 2)	Substantial Discount or Premium? (Step 3)	Contingently Exercisable? (Step 4)	Embedded Option Clearly and Closely Related?
Debt security issued at par is callable at par plus an interest make-whole premium that may not exceed 5 percent of the principal amount.	Yes. The amount paid upon settlement is adjusted on the basis of changes in the then-current U.S. Treasury rate. The calculation of the interest make-whole premium includes the U.S. Treasury rate. The payoff is not, however, indexed to an underlying other than interest rates or credit risk.	No. The debt was issued at par and the interest make-whole premium cannot exceed 5 percent of the principal amount.	N/A. Analysis is not required because the answer to the question in step 3 is no (i.e., no substantial discount or premium).	Yes. The embedded call option, including the interest make-whole provision, is clearly and closely related to the debt host. ASC 815-15-25-26 applies since the interest make-whole premium is indexed to an interest rate. Under ASC 815-15-25-26(a), there is no circumstance in which the investor would not contractually recover its initial investment if the issuer exercises the call option because the repayment amount will exceed the principal amount, and the debt was issued at par. ASC 815-15-25-26(b) does not apply. ASC 815-15-25-37 states that this condition does “not apply to an embedded call option in a hybrid instrument containing a debt host contract if the right to accelerate the settlement of the debt can be exercised only by the debtor.”

ASC 815-15

55-13 The following table demonstrates the application of the four-step decision sequence in paragraph 815-15-25-42 for determining whether call options and put options that can accelerate the settlement of debt instruments should be considered to be clearly and closely related to the debt host contract under the criterion in paragraph 815-15-25-1(a).

Instrument	Indexed Payoff? (Steps 1 and 2)	Substantial Discount or Premium? (Step 3)	Contingently Exercisable? (Step 4)	Embedded Option Clearly and Closely Related?
1. Debt that is issued at a substantial discount is callable at any time during its 10-year term. If the debt is called, the investor receives the par value of the debt plus any unpaid and accrued interest.	No.	Yes.	No.	The embedded call option is clearly and closely related to the debt host contract because the payoff is not indexed, and the call option is not contingently exercisable.
2. Debt that is issued at par is callable at any time during its term. If the debt is called, the investor receives the greater of the par value of the debt or the market value of 100,000 shares of XYZ common stock (an unrelated entity).	Yes, based on an equity price.	N/A. Analysis not required.	N/A. Analysis not required.	The embedded call option is not clearly and closely related to the debt host contract because the payoff is indexed to an equity price.
3. Debt that is issued at par is puttable if the Standard and Poor’s S&P 500 Index increases by at least 20 percent. If the debt is put, the investor receives the par amount of the debt adjusted for the percentage increase in the S&P 500.	Yes, based on an equity index (S&P 500).	N/A. Analysis not required.	N/A. Analysis not required.	The embedded put option is not clearly and closely related to the debt host contract because the payoff is indexed to an equity price.
4. Debt that is issued at a substantial discount is puttable at par if London Interbank Offered Rate (LIBOR) either increases or decreases by 150 basis points.	No.	Yes.	Yes, contingent on a movement of LIBOR of at least 150 basis points.	The put option is not clearly and closely related to the debt host contract because the debt was issued at a substantial discount and the put option is contingently exercisable.
5. Debt that is issued at a substantial discount is puttable at par in the event of a change in control.	No.	Yes.	Yes, contingent on a change in control.	The put option is not clearly and closely related to the debt host contract because the debt was issued at a substantial discount and the put option is contingently exercisable.
6. Zero coupon debt is issued at a substantial discount and is callable in the event of a change in control. If the debt is called, the issuer pays the accreted value (calculated per amortization table based on the effective interest rate method).	No.	Yes.	Yes, contingent on a change in control, but since the debt is callable at accreted value, the call option does not accelerate the repayment of principal.	The call option is clearly and closely related to the debt host contract. Although the debt was issued at a substantial discount and the call option is contingently exercisable, the call option does not accelerate the repayment of principal because the debt is callable at the accreted value.
7. Debt that is issued at par is puttable at par in the event that the issuer has an initial public offering.	No.	No.	N/A. Analysis not required.	The embedded put option is clearly and closely related to the debt host contract because the debt was issued at par (not at a substantial discount) and is puttable at par. Paragraph 815-15-25-26 does not apply.
8. Debt that is issued at par is puttable if the price of the common stock of Entity XYZ (an entity unrelated to the issuer or investor) changes by 20 percent. If the debt is put, the investor will be repaid based on the value of Entity XYZ’s common stock.	Yes, based on an equity price (price of Entity XYZ’s common stock).	N/A. Analysis not required.	N/A. Analysis not required.	The embedded put option is not clearly and closely related to the debt host contract because the payoff is indexed to an equity price.
9. Debt is issued at a slight discount and is puttable if interest rates move 200 basis points. If the debt is put, the investor will be repaid based on the S&P 500.	Yes, based on an equity index (S&P 500).	N/A. Analysis not required.	N/A. Analysis not required.	The embedded put option is not clearly and closely related to the debt host contract because the payoff is based on an equity index.

Connecting the Dots

As discussed in Section 4.4.4.1, when a contract is modified, it must be reassessed to identify and evaluate any embedded derivatives for potential bifurcation. This analysis is more complex in a modification of a debt instrument that is accounted for as a troubled debt restructuring. See Section 11.4.4.5 of Deloitte’s Roadmap Issuer’s Accounting for Debt for additional details.

6.4.4 Derivative Analysis

6.4.4.1 General

The table below presents an analysis of whether a redemption feature embedded in a debt host contract meets the definition of a derivative. However, an entity should always consider the terms and conditions of a specific feature in light of the applicable accounting guidance before reaching a conclusion.

Characteristics of a Derivative	Characteristic Present?	Analysis
Underlying and notional amount or payment provision (see Section 1.4.1)	Yes	A redemption feature has both an underlying (interest rates and, if applicable, the occurrence or nonoccurrence of any exercise contingency and any other underlyings that adjust the redemption amount) and a notional amount (the debt’s principal amount) or payment provision.
Initial net investment (see Section 1.4.2)	Yes	The initial net investment in an embedded feature is its fair value (i.e., the amount that would need to be paid to acquire the redemption feature on a stand-alone basis without the host contract). Generally, a redemption feature has an initial net investment that is smaller than would be required for a direct investment that pays the redemption amount (since the investment in the debt host contract does not form part of the initial net investment in the embedded feature).
Net settlement (see Section 1.4.3)	Yes	The potential settlement that would occur upon the exercise of the redemption feature in a debt host contract always meets the net settlement condition because neither party is required to deliver an asset that is associated with the underlying.

As shown in the table above, a redemption feature embedded in a debt host contract meets the definition of a derivative. Therefore, the analysis of whether such a feature must be bifurcated as a derivative tends to focus on whether the feature is considered clearly and closely related to the debt host contract unless the entity records the hybrid instrument at fair value, with changes in fair value recorded through earnings.

6.4.4.2 Net Settlement Analysis

ASC 815-10

Net Settlement of a Debt Instrument Through Exercise of an Embedded Put Option or Call Option

15-107 The potential settlement of the debtor’s obligation to the creditor that would occur upon exercise of a put option or call option embedded in a debt instrument meets the net settlement criterion as discussed beginning in paragraph 815-10-15-100 because neither party is required to deliver an asset that is associated with the underlying. Specifically:

The debtor does not receive an asset when it settles the debt obligation in conjunction with exercise of the put option or call option.
The creditor does not receive an asset associated with the underlying.

15-108 The guidance in the preceding paragraph shall be applied under both of the following circumstances:

When applying paragraph 815-15-25-1(c) to a put option or call option (including a prepayment option) embedded in a debt instrument
When analyzing the net settlement criterion (see guidance beginning in paragraph 815-10-15-100) for a freestanding call option held by the debtor on its own debt instrument and for a freestanding put option issued by the debtor on its own debt instrument.

15-109 The guidance in paragraph 815-10-15-107 shall not be applied under either of the following circumstances:

To put or call options that are added to a debt instrument by a third party contemporaneously with or after the issuance of a debt instrument. (In that circumstance, see paragraph 815-10-15-6.)
By analogy to an embedded put or call option in a hybrid instrument that does not contain a debt host contract.

ASC 815-10-15-107 through 15-109 indicate that the potential settlement of a debtor’s obligation to the creditor that would occur upon the exercise of a put or call option (including a prepayment option) embedded in a debt instrument meets the net settlement condition in ASC 815-10-15-100, which states, in part, that “neither party is required to deliver an asset that is associated with the underlying and that has a principal amount, stated amount, face value, number of shares, or other denomination that is equal to the notional amount.”

Accordingly, a call, put, or other redemption feature that is embedded in a debt host meets the net settlement characteristic in the definition of a derivative irrespective of whether the debt host contract is RCC. For instance, such a feature is considered to meet the net settlement characteristic even if it is embedded in a loan or debt security that does not have an observable price. Further, a call, put, or other redemption feature embedded in a debt host meets the net settlement characteristic even if it is settled in a form other than cash.

Traditionally, the settlement of a debt obligation upon the exercise of a put or call results in the creditor’s receipt of cash in exchange for tendering the debt obligation. However, in some circumstances, the debtor either is required or has the option to settle the redemption by delivering a number of shares of its own stock with a value equal to a predetermined dollar amount. An embedded redemption feature in a hybrid financial instrument with a debt host that may be settled with the issuer’s shares always meets the net settlement characteristic under the guidance in ASC 815-10-15-107 on put or call options in debt host contracts. In the evaluation under ASC 815-10-15-107(b) of a share-settled put, call, or redemption feature embedded in a debt host contract, the assets being delivered to the holder upon the settlement of the feature are shares of the issuer. Such shares are not associated with the embedded feature’s underlying because the monetary value of the shares to be delivered does not vary on the basis of the share price. In other words, the holder is indifferent to changes in the value of any of the equity shares until the feature is settled. Therefore, the net settlement criterion is met regardless of whether the underlying shares are RCC. The guidance in ASC 815-10-15-107 through 15-109 does not apply to calls, puts, and other redemption features that are embedded in equity host contracts.

Example 6-7

Notes That Are Automatically Converted Into Shares Upon a Qualifying Equity Offering

Company XYZ issues $1 million of notes to an investor group. According to the terms of the notes, XYZ is required to pay interest semiannually at a rate of 8 percent per annum. Principal on the notes is due at maturity, which is two years after issuance. Upon a qualifying equity offering (one in which XYZ raises at least $10 million of equity), the notes are automatically converted into shares sold in the qualifying equity offering. The conversion price equals 80 percent of the price per share of the qualifying equity offering. For example, if XYZ issued $10 million of Series D preferred stock at $10 per share, the notes would be converted into Series D preferred stock at $8 per share.

The automatic conversion upon a qualifying equity offering is economically a contingent redemption of the notes for $1.25 million (i.e., $10,000,000 ÷ $8). However, the investors do not receive $1.25 million in cash; rather, the redemption feature is settled in shares of XYZ with a value of $1.25 million.

The redemption feature would not be considered clearly and closely related to the debt host because it is a contingent redemption and involves a significant premium relative to the amount paid by the investors — $1.25 million compared with $1 million (see ASC 815-15-25-42). ASC 815-15-25-26 is not applicable because this is a contingent redemption whose underlying is an event (i.e., not an interest rate or interest rate index-only underlying). Assuming that the debt is not remeasured at fair value, with changes in fair value recognized in earnings, XYZ would be required to bifurcate the redemption option because a separate instrument with the same terms would be subject to derivative accounting under ASC 815.

In the evaluation of the net settlement condition under ASC 815-10-15-107(b), the assets being delivered to the holder of the debt instrument are shares of the issuer, which are not associated with any underlying because the value of the shares to be delivered is a fixed dollar amount. In other words, even though the shares to be issued to the investor group are related to the event that triggers redemption (i.e., the shares delivered are the same shares issued in the qualifying equity offering) and an event is considered an underlying, the holder is indifferent to changes in the value of any of the issuer’s equity shares during the time between debt issuance and the triggering of the redemption feature because the holder will receive a fixed dollar amount once the redemption is triggered. Therefore, with respect to the condition in ASC 815-10-15-107(b), the shares are not associated with any underlying, regardless of whether the underlying shares are RCC.

From XYZ’s perspective, the embedded redemption feature related to the automatic conversion upon a qualifying equity offering must be bifurcated from the host contract and accounted for as a derivative liability because all three criteria for bifurcation are met.

From the perspective of the investors in XYZ’s notes, whether the embedded redemption feature requires bifurcation will depend on whether the investor has classified the debt security as a trading security or under the fair value option. If the investor records the full investment at fair value, with changes recorded through earnings, bifurcation of the embedded feature would not be required.

Example 6-8

Convertible Debt With a Share-Settled Redemption Feature

An entity has issued a debt instrument with a principal amount of $10 million that is automatically converted into the issuer’s equity shares upon an IPO. The conversion price is the lower of 80 percent of the stock price in the IPO or $50. Although the conversion price in this scenario is reduced to the IPO price if the IPO price is below $50, the potential adjustment is not a down-round feature because the associated settlement has a monetary value equal to a fixed monetary amount ($10,000,000 ÷ 80% = $12,500,000). The entity should evaluate this share-settled redemption feature in a manner similar to how it evaluates a put or call option embedded in a debt host contract to determine whether the feature must be separated as a derivative under ASC 815-15.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.