Chapter 1 — Overview | DART – Deloitte Accounting Research Tool

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ASC 815-40

05-1 For a number of business reasons, an entity may enter into contracts that are indexed to, and sometimes settled in, its own stock. This Subtopic provides guidance on accounting for such contracts. Examples of these contracts include put and call options (both written and purchased) and forward contracts (for both sales and purchases). These contracts may be settled using a variety of settlement methods, or the issuing entity or counterparty may have a choice of settlement methods. The contracts may be either freestanding or embedded in another financial instrument.

ASC 815-40 provides guidance on the accounting for contracts that are potentially indexed to, and potentially settled in, an entity’s own equity (also known as contracts on own equity or equity-linked financial instruments). Examples of contracts and transactions that may require evaluation under ASC 815-40 include:

Call options on own stock (both written and purchased).
Warrants on own stock.
Forward contracts to sell own stock.
Purchased put options on own stock.
Accelerated share repurchase programs.
Contingent consideration arrangements in business combinations.
Convertible bond hedges.
Equity line facilities that permit an entity to sell own stock.
Hybrid equity units.
Prepaid forward purchases of own stock.
Prepaid written put options on own stock.

While the accounting requirements in ASC 815-40 focus on freestanding instruments, some of the guidance also applies to features embedded in other contracts. In particular, the indexation guidance and other conditions for equity classification in ASC 815-40 apply to both freestanding and embedded derivative instruments in the evaluation of whether they are exempt from derivative accounting (see Section 2.2). Examples of embedded derivative features that would be assessed under the indexation and equity classification guidance in ASC 815-40 include:

Equity conversion features embedded in debt or equity securities or lines of credit that are debt hosts.
Written put options embedded in the entity’s equity securities (i.e., stock redeemable by the holder).
Redemption requirements in equity securities that are not certain to be redeemed (e.g., mandatorily redeemable convertible preferred stock).

ASC 815-40 also provides guidance on whether a contract on own equity should be classified as equity or as an asset or a liability. In making this determination, an entity considers the following questions:

Question	Roadmap Discussion
Is the instrument within the scope of ASC 815-40?	Chapter 2
What are the terms of the instrument?	Chapter 3
Does the instrument meet the criteria to be considered indexed to the entity’s own stock?	Chapter 4
Does the instrument meet other conditions for equity classification?	Chapter 5

Only an equity-linked instrument that is both indexed to the entity’s own stock and meets all other conditions for equity classification can be classified as equity. If an instrument either (1) is not considered indexed to the entity’s own stock (e.g., because it is indexed to an extraneous variable such as the price of gold) or (2) does not meet other conditions for equity classification (e.g., because the entity could be forced to net cash settle the contract), the instrument is classified as an asset or a liability.

In addition, ASC 815-40 provides guidance (other than for embedded features) on the following aspects of the accounting for freestanding equity-linked financial instruments (Chapter 6):

Initial measurement (i.e., fair value).
Subsequent measurement (which depends on the instrument’s classification as equity or an asset or a liability).
Reclassification between (1) equity and (2) liabilities or assets (the classification of an equity-linked instrument is subject to continual reassessment).
Settlements.

Further, ASC 815-40 includes disclosure requirements for contracts on an entity’s own equity (Chapter 7).

Some entities are affected by both U.S. GAAP and IFRS® Accounting Standards. There are significant differences between the guidance in ASC 815-40 and the equivalent guidance under IFRS Accounting Standards (Chapter 8).

The appendixes of this Roadmap include a tabular overview of the FASB’s examples in ASC 815-40 (Appendix A), checklists for determining whether a contract or embedded feature qualifies as equity under ASC 815-40 (Appendix B), and the definitions of selected terms from the ASC master glossary (Appendix C).

Connecting the Dots

When analyzing equity-linked instruments, entities typically must also consider the guidance in:

ASC 260 (see Deloitte’s Roadmap Earnings per Share).
ASC 470 (see Deloitte’s Roadmap Issuer’s Accounting for Debt).
ASC 480 (see Deloitte’s Roadmap Distinguishing Liabilities From Equity).
ASC 815 (see Deloitte's Roadmap Derivatives).

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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.