Appendix B — Checklists for Determining Whether Freestanding Contracts or Embedded Features Qualify as Equity

B.1 Freestanding Contracts

A freestanding contract is classified as equity under ASC 815-40 only if it meets all the requirements outlined in the table below. In determining whether those requirements are met, an entity:

Does not consider the contingent obligation to transfer consideration under a registration payment arrangement even if it is embedded in the contract (see Section 3.2.4).
Disregards any uneconomic settlement alternatives (see Section 5.2.5).

√ If Met	Requirement	Roadmap Discussion
	Within the Scope of ASC 815-40
	The contract is not required to be classified as a liability under ASC 480.	Section 2.3
	If the contract was originally issued to a grantee in a share-based payment arrangement that is within the scope of ASC 718, it becomes subject to ASC 815-40.	Section 2.4
	The contract is not a lock-up option.	Section 2.5.2
	If the contract is on the equity shares of a subsidiary, the subsidiary is a consolidated, substantive entity.	Section 2.6.1
	The contract does not represent the combination of a written put option and a purchased call option embedded in the shares of a noncontrolling interest.	Section 2.6.4
	Indexed to the Entity’s Own Equity
	If the contract contains an exercise contingency that is based on an observable market, it is the market for the issuer’s stock.	Section 4.2
	If the contract contains an exercise contingency that is based on an observable index, it is an index calculated or measured solely by reference to the entity’s own operations (e.g., sales revenue, EBITDA, net income, or total equity).	Section 4.2
	If the settlement amount is adjusted in response to changes in an explicit input, that input is not extraneous but rather an input in the pricing of a fixed-for-fixed forward or option on the entity’s equity shares.	Section 4.3
	If the settlement amount is adjusted in response to changes in an explicit input (other than the entity’s stock price), the adjustment is not inconsistent with how a change in the input would affect the pricing of a fixed-for-fixed forward or option on the entity’s equity shares (e.g., it is not leveraged).	Section 4.3
	If the settlement amount is adjusted in response to changes in an explicit or an implicit input (other than the entity’s stock price), the change in the input cannot result in a settlement at a fixed monetary amount.	Section 4.3
	If the settlement amount is adjusted in response to the occurrence or nonoccurrence of a specified event, the event invalidates an implicit assumption used in the pricing of a fixed-for-fixed forward or option on the entity’s equity shares (e.g., no dilutive event) or the adjustment is triggered by a down-round feature.	Section 4.3
	If the settlement amount is adjusted in response to an implicit input, the adjustment is consistent with the effect that the occurrence or nonoccurrence of the event had on the fair value of the instrument.	Section 4.3
	The contract otherwise is a fixed-for-fixed forward or option on the entity’s equity shares.	Section 4.3
	Equity Classification Conditions
	The only circumstance (if any) in which the entity could be forced to net cash settle the contract is: An event that is solely within the entity’s control or The final liquidation of the entity or An event that results in a change of control of the entity (and that meets certain other conditions) or An event that would cause all of the holders of the underlying shares to receive the same form of consideration.	Section 5.2.3
	The economic substance of the contract is not that of an asset or a liability because: The settlement alternatives have different economic values or One of the settlement alternatives is fixed or contains caps or floors. (Note that this requirement does not apply if the reason for the difference is to limit the number of shares that must be delivered in a net share settlement.)	Section 5.2.5
	If the settlement alternatives differ in gain and loss positions, the contract: Permits the entity to net share settle in a loss position and Is not predominantly a purchased option.	Section 5.2.6
	If the entity does not have sufficient authorized and unissued shares available to share settle the contract and all other contracts that may require share settlement during the contract period, the entity has the ability to increase the number of authorized shares without shareholder approval.	Section 5.3.3
	The contract contains an explicit share limit.	Section 5.3.4
	The contract does not require net cash settlement if the entity fails to timely file.	Section 5.3.5
	If the contract includes a top-off or make-whole provision, it: Can be net share settled and Is subject to a fixed share limit that is less than the number of available authorized and unissued shares.	Section 5.3.6

B.2 Features Embedded in Hybrid Contracts Other Than Certain Types of Convertible Debt

An embedded feature other than one embedded in certain types of convertible debt (see Section 5.5) qualifies as equity under ASC 815-40 only if it meets all the requirements outlined in the table below. In determining whether those requirements are met, an entity:

Does not consider the contingent obligation to transfer consideration under a registration payment arrangement even if it is embedded in the contract (see Section 3.2.4).
Disregards any uneconomic settlement alternatives (see Section 5.2.5).

√ If Met	Requirement	Roadmap Discussion
	Within the Scope of ASC 815-40
	If the contract was originally issued to a grantee in a share-based payment arrangement that is within the scope of ASC 718, it becomes subject to ASC 815-40.	Section 2.4
	The embedded feature is not a lock-up option.	Section 2.5.2
	If the embedded feature is on the equity shares of a subsidiary, the subsidiary is a consolidated, substantive entity.	Section 2.6.1
	The embedded feature does not involve the combination of a written put option and a purchased call option embedded in the shares of a noncontrolling interest.	Section 2.6.4
	Indexed to the Entity’s Own Equity
	If the embedded feature contains an exercise contingency that is based on an observable market, it is the market for the issuer’s stock.	Section 4.2
	If the embedded feature contains an exercise contingency that is based on an observable index, it is an index calculated or measured solely by reference to the entity’s own operations (e.g., sales revenue, EBITDA, net income, or total equity).	Section 4.2
	If the settlement amount is adjusted in response to changes in an explicit input, that input is not extraneous but rather an input in the pricing of a fixed-for-fixed forward or option on the entity’s equity shares.	Section 4.3
	If the settlement amount is adjusted in response to changes in an explicit input (other than the entity’s stock price), the adjustment is not inconsistent with how a change in the input would affect the pricing of a fixed-for-fixed forward or option on the entity’s equity shares (e.g., it is not leveraged).	Section 4.3
	If the settlement amount is adjusted in response to changes in an explicit or an implicit input (other than the entity’s stock price), the change in the input cannot result in a settlement at a fixed monetary amount.	Section 4.3
	If the settlement amount is adjusted in response to the occurrence or nonoccurrence of a specified event, the event invalidates an implicit assumption used in the pricing of a fixed-for-fixed forward or option on the entity’s equity shares (e.g., no dilutive event) or the adjustment is triggered by a down-round feature.	Section 4.3
	If the settlement amount is adjusted in response to an implicit input, the adjustment is consistent with the impact that the occurrence or nonoccurrence of the event had on the fair value of the instrument.	Section 4.3
	The embedded feature otherwise is a fixed-for-fixed forward or option on the entity’s equity shares.	Section 4.3
	Equity Classification Conditions
	The only circumstance (if any) in which the entity could be forced to net cash settle the embedded feature is: An event that is solely within the entity’s control or The final liquidation of the entity or An event that results in a change of control of the entity (and that meets certain other conditions) or An event that would cause the all of holders of the underlying shares to receive the same form of consideration.	Section 5.2.3
	The economic substance of the embedded feature is not that of an asset or a liability because: The settlement alternatives have different economic values or One of the settlement alternatives is fixed or contains caps or floors. (Note that this requirement does not apply if the reason for the difference is to limit the number of shares that must be delivered in a net share settlement.)	Section 5.2.5
	If the settlement alternatives differ in gain and loss positions, the embedded feature: Permits the entity to net share settle in a loss position and Is not predominantly a purchased option.	Section 5.2.6
	If the entity does not have sufficient authorized and unissued shares available to share settle the contract and all other contracts that may require share settlement during the contract period, the entity has the ability to increase the number of authorized shares without shareholder approval.	Section 5.3.3
	The embedded feature contains an explicit share limit.	Section 5.3.4
	The embedded feature does not require net cash settlement if the entity fails to timely file.	Section 5.3.5
	If the embedded feature includes a top-off or make-whole provision, it: Can be net share settled and Is subject to a fixed share limit that is less than the number of available authorized and unissued shares.	Section 5.3.6

B.3 Features Embedded in Certain Types of Convertible Debt

A feature embedded in certain types of convertible debt (see Section 5.5) qualifies as equity under ASC 815-40 only if it meets all the requirements specified in the table below. In determining whether those requirements are met, an entity:

Does not consider the contingent obligation to transfer consideration under a registration payment arrangement even if it is embedded in the contract (see Section 3.2.4).
Disregards any uneconomic settlement alternatives (see Section 5.2.5).

√ If Met	Requirement	Roadmap Discussion
	Within the Scope of ASC 815-40
	If the contract was originally issued to a grantee in a share-based payment arrangement that is within the scope of ASC 718, it becomes subject to ASC 815-40.	Section 2.4
	The embedded feature is not a lock-up option.	Section 2.5.2
	If the embedded feature is on the equity shares of a subsidiary, the subsidiary is a consolidated, substantive entity.	Section 2.6.1
	The embedded feature does not involve the combination of a written put option and a purchased call option embedded in the shares of a noncontrolling interest.	Section 2.6.4
	Indexed to the Entity’s Own Equity
	If the embedded feature contains an exercise contingency that is based on an observable market, it is the market for the issuer’s stock.	Section 4.2
	If the embedded feature contains an exercise contingency that is based on an observable index, it is an index calculated or measured solely by reference to the entity’s own operations (e.g., sales revenue, EBITDA, net income, or total equity).	Section 4.2
	If the settlement amount is adjusted in response to changes in an explicit input, that input is not extraneous but rather an input in the pricing of a fixed-for-fixed forward or option on the entity’s equity shares.	Section 4.3
	If the settlement amount is adjusted in response to changes in an explicit input (other than the entity’s stock price), the adjustment is not inconsistent with how a change in the input would affect the pricing of a fixed-for-fixed forward or option on the entity’s equity shares (e.g., it is not leveraged).	Section 4.3
	If the settlement amount is adjusted in response to changes in an explicit or an implicit input (other than the entity’s stock price), the change in the input cannot result in a settlement at a fixed monetary amount.	Section 4.3
	If the settlement amount is adjusted in response to the occurrence or nonoccurrence of a specified event, the event invalidates an implicit assumption used in the pricing of a fixed-for-fixed forward or option on the entity’s equity shares (e.g., no dilutive event) or the adjustment is triggered by a down-round feature.	Section 4.3
	If the settlement amount is adjusted in response to an implicit input, the adjustment is consistent with the impact that the occurrence or nonoccurrence of the event had on the fair value of the instrument.	Section 4.3
	The embedded feature otherwise is a fixed-for-fixed forward or option on the entity’s equity shares.	Section 4.3
	Equity Classification Conditions
	The only circumstance (if any) in which the entity could be forced to net cash settle the embedded feature is: An event that is solely within the entity’s control or The final liquidation of the entity or An event that results in a change of control of the entity (and that meets certain other conditions) or An event that would cause all of the holders of the underlying shares to receive the same form of consideration or One of the conditions in ASC 815-40-25-10.	Section 5.2.3
	The economic substance of the embedded feature is not that of an asset or a liability because: The settlement alternatives have different economic values or One of the settlement alternatives is fixed or contains caps or floors. (Note that this requirement does not apply if the reason for the difference is to limit the number of shares that must be delivered in a net share settlement.)	Section 5.2.5
	If the settlement alternatives differ in gain and loss positions, the embedded feature: Permits the entity to net share settle in a loss position and Is not predominantly a purchased option.	Section 5.2.6