12.3 Convertible Debt With No Equity Component

12.3.1 Background

If convertible debt that does not contain a bifurcated embedded conversion feature under ASC 815-15 or a separately recognized equity component is converted into the issuer’s equity shares under the instrument’s original conversion terms, (1) the net carrying amount of the debt is derecognized and cash, equity, or both are credited to reflect the consideration issued and (2) no gain or loss is recognized (see Section 12.3.2). In practice, this is often referred to “conversion accounting.”1 If the conversion qualifies as an “induced conversion” under ASC 470-20-40-16, the issuer first recognizes “an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable [under] the original conversion terms” and then applies conversion accounting (see Section 12.3.4).

12.3.2 Conversion in Accordance With the Original Conversion Terms

ASC 470-20

35-11 If the terms of conversion of a convertible debt instrument provide that any accrued but unpaid interest at the date of conversion is forfeited by the former debt holder, that interest should be accrued or imputed to the date of conversion of the debt instrument.

Contractual Conversion

40-4 If a convertible debt instrument accounted for in its entirety as a liability under paragraph 470-20-25-12 is converted into shares, cash (or other assets), or any combination of shares and cash (or other assets), in accordance with the conversion privileges provided in the terms of the instrument, upon conversion the carrying amount of the convertible debt instrument, including any unamortized premium, discount, or issuance costs, shall be reduced by, if any, the cash (or other assets) transferred and then shall be recognized in the capital accounts to reflect the shares issued and no gain or loss is recognized.

Interest Forfeiture

40-11 If the terms of conversion of a convertible debt instrument provide that any accrued but unpaid interest at the date of conversion is forfeited by the former debt holder, accrued interest from the last interest payment date, if applicable, to the date of conversion, net of related income tax effects, if any, shall be charged to interest expense and credited to capital as part of the cost of securities issued. Thus, the accrued interest is accounted for in the same way as the principal amount of the debt converted and any unamortized premium, discount, or issuance costs; the net carrying amount of the debt, including any unamortized premium, discount, or issuance costs and the related accrual for interest to the date of conversion, net of any related income tax effects, is a credit to the entity’s capital.

ASC 470-20-40-4 specifies the accounting for a conversion of a convertible debt instrument that (1) does not contain a bifurcated embedded conversion feature under ASC 815-15 and (2) is not addressed by other guidance (i.e., conversions of convertible debt that contain a separately recorded equity component as well as induced conversions). Under this guidance, no gain or loss is recognized upon the conversion of debt into shares, cash, or other assets in accordance with the debt’s original conversion terms. Conversion accounting does not apply if the minimum number of shares that were required to be issued under the original conversion terms have not been issued.

If the conversion feature is settled entirely in shares, the debt’s net carrying amount is credited to equity upon conversion to reflect the equity shares issued. For example, the issuer may make the following accounting entry:

Convertible debt

Equity — common stock/APIC

If the conversion feature is settled (1) entirely in cash upon conversion or (2) in a combination of cash and shares, the journal entry would differ because it would reflect the payment of cash in lieu of equity shares, but the issuer still would recognize no gain or loss on the conversion date.

The net carrying amount of the debt reflects any remaining unamortized discount or premium as of the date of conversion as well as any remaining unamortized debt issuance costs as of that date, in accordance with the definition of “net carrying amount of debt” in ASC 470-50 (see Section 9.3.1.3). The issuer should amortize any premium or discount and debt issuance costs up to the date on which the instrument is converted. As indicated in ASC 470-20-40-11, the carrying amount also includes any “accrued interest from the last interest payment date, if applicable, to the date of conversion, net of related income tax effects, if any,” irrespective of whether accrued unpaid interest is forfeited upon conversion. If convertible debt does not contain a bifurcated embedded conversion feature under ASC 815-15 (see Section 12.4) or a separately recognized equity component (see Section 12.5), the accrued interest cost, net of any related income tax effects, is credited to equity as part of the cost of any equity shares issued.

See Section 12.3.4 for a discussion of the accounting for induced conversions. See Section 12.4 for a discussion of the accounting for a conversion of a convertible debt instrument for which the embedded conversion option has been separated as an embedded derivative liability. Such accounting applies if the embedded conversion option has been separated from the host debt instrument upon or after issuance but before conversion. See Section 12.5 for a discussion of the application of conversion accounting to a convertible debt instrument with a separated equity component.

Connecting the Dots

For certain convertible debt instruments, the issuer may elect to settle a conversion partially or fully in cash. In such cases, the issuer must elect to settle the conversion value in cash on a date before the settlement occurs. Consequently, if the election is irrevocable and the issuer elects to settle all or a portion of the conversion value in cash, the embedded conversion feature will no longer meet the own-equity exception in ASC 815-10-15-74(a). Therefore, the issuer will have to bifurcate the embedded conversion feature as a derivative instrument under ASC 815-15. The nature of the embedded derivative that must be bifurcated will depend on the facts and circumstances.

For example, assume the following:

A convertible debt instrument requires the issuer to settle the principal amount in cash and permits the issuer to settle the excess conversion value in either cash or shares (i.e., Instrument C).
The holders of the instrument give irrevocable notice that they will convert the instrument.
On the date the issuer receives the conversion notice, it must choose to settle the excess conversion value in either cash or shares. If the issuer elects cash settlement, the amount of cash that must be paid to settle the excess conversion value is calculated over a 30-day period after the date of conversion on the basis of the volume-weighted average price (VWAP) of the issuer’s stock.
The issuer elects to settle the excess conversion value in cash.

In this situation, the conversion feature no longer qualifies for the own-equity exception in ASC 815-10-15-74(a); therefore, the issuer must bifurcate this feature. Such bifurcated derivative will represent a nonoption embedded derivative that the issuer must initially recognize at zero in accordance with ASC 815-15-55-160 through 55-164. However, the issuer must recognize in earnings the bifurcated embedded derivative’s change in fair value from the date of the irrevocable notice to settle the excess conversion value in cash until the settlement date (i.e., a derivative balance will exist after initial bifurcation). Depending on variations in the issuer’s share price, the change in fair value could represent an asset or a liability.

Conversion accounting is still appropriate in this example because the separation of the conversion feature is incidental to the settlement of the debt instrument in accordance with its original conversion terms. In the application of conversion accounting, the net carrying amount of the convertible debt will include the fair value of the bifurcated embedded derivative. Therefore, no gain or loss will be recognized on the conversion date (i.e., the settlement date). Nevertheless, the gain or loss on the bifurcated embedded derivative should not be reversed (i.e., it will remain recognized in earnings). Thus, while the conversion of the instrument does give rise to a gain or loss that is reported in earnings (i.e., for the period between the date on which the issuer elects cash settlement and the settlement date), it does not invalidate the application of conversion accounting as of the settlement date. That is, extinguishment accounting is not required. The alternative views discussed in Section 12.4 are not relevant to these types of settlements.

As another example, assume the same facts as described above except that six months before the convertible debt instrument’s maturity, the issuer must give irrevocable notice either that it will settle any excess conversion value in cash or that it will settle such value in shares. If the issuer irrevocably elects cash settlement, the conversion feature no longer qualifies for the own-equity exception in ASC 815-10-15-74(a); therefore, the issuer must bifurcate this feature. However, in this situation, the issuer must bifurcate an option-based embedded derivative because the holders have not yet elected whether they will convert the instrument. In accordance with ASC 815-15-30-6, when an option-based embedded derivative is separated, the exercise price of the feature must be based on the stated terms in the convertible debt agreement. As a result, such embedded derivative will not have a fair value of zero on the date of initial bifurcation. Consequently, the fair value of the conversion feature on the date of separation will create a discount on the host debt instrument that must be amortized to interest expense over the instrument’s remaining life. In addition, the bifurcated option-based embedded derivative must be subsequently remeasured at fair value through earnings. These changes in fair value cannot be reversed on the settlement date of the instrument. For more information, see Example 5-8 in Deloitte’s Roadmap Contracts on an Entity’s Own Equity.

12.3.3 Conversion Upon the Issuer’s Exercise of a Call Option

12.3.3.1 General

ASC 470-20

05-11 An entity may issue equity securities to settle a debt instrument that was not otherwise currently convertible but became convertible upon the issuer’s exercise of a call option when the issuance of equity securities is pursuant to the instrument’s original conversion terms. This Subtopic provides related guidance.

40-5 The following guidance addresses accounting for the issuance of equity securities to settle a debt instrument (pursuant to the instrument’s original conversion terms) that became convertible upon the issuer’s exercise of a call option:

Substantive conversion feature. If the debt instrument contained a substantive conversion feature as of time of issuance, the issuance of equity securities shall be accounted for as a contractual conversion. That is, no gain or loss shall be recognized related to the equity securities issued to settle the instrument.
No substantive conversion feature. If the debt instrument did not contain a substantive conversion feature as of time of issuance, the issuance of equity securities shall be accounted for as a debt extinguishment. That is, the fair value of the equity securities issued should be considered a component of the reacquisition price of the debt.

Sometimes, the terms of a convertible debt instrument include both (1) an option for the issuer to call the instrument and (2) a right for the holder to exercise the conversion feature if the issuer calls the instrument. In this circumstance, the accounting for the conversion of the instrument into the issuer’s equity shares in accordance with the original terms of the debt depends on whether the conversion feature was (1) otherwise currently convertible and (2) substantive as of the instrument’s issuance date (see Section 12.3.3.2).

If the conversion option is nonsubstantive at issuance and the instrument becomes convertible upon the issuer’s exercise of the call option, the conversion of the instrument into equity shares is accounted for as a debt extinguishment (see Section 9.3). As long as the conversion feature is nonsubstantive at issuance, and provided that the holder does not currently have the ability to convert the instrument unless the issuer exercises its call option, extinguishment accounting applies even if the instrument would have become convertible upon the passage of time (e.g., a conversion option that becomes exercisable on the instrument’s maturity date or on specified prior dates).

The conversion of an instrument into the issuer’s equity shares is accounted for as a conversion (see Section 12.3.2) as long as it otherwise qualifies for such accounting if either (1) the conversion feature is substantive at issuance or (2) the holder has the ability to exercise the conversion feature irrespective of the issuer’s exercise of its call option.

Convertibility of Debt Instrument	Conversion Feature Substantive at Inception	Conversion Feature Not Substantive at Inception
Convertible only upon the issuer’s exercise of a call option	N/A. (By definition, such a conversion option is not substantive as of the issuance date.)	Accounted for as an extinguishment.
Convertible upon the issuer’s exercise of a call option and could otherwise become convertible in the future	Accounted for as a conversion.	Accounted for as an extinguishment.
Currently convertible even if the issuer has not exercised its call option	Accounted for as a conversion. Because the instrument is convertible without the issuer’s exercise of a call option, the accounting does not depend on whether the conversion option was substantive on the issuance date.

This guidance does not apply to transactions that would not otherwise qualify for conversion accounting (see Section 12.2) or to induced conversions. See Section 12.4 for a discussion of the accounting for a conversion of a convertible debt instrument for which the embedded conversion option has been separated as an embedded derivative liability. Such accounting applies if the embedded conversion option has been separated from the host debt instrument upon or after issuance but before conversion.

12.3.3.2 Determining Whether a Conversion Feature Is Substantive

ASC Master Glossary

Substantive Conversion Feature

A conversion feature that is at least reasonably possible of being exercisable in the future absent the issuer’s exercise of a call option.

ASC 470-20

40-6 The assessment of whether the conversion feature is substantive may be performed after time of issuance but shall be based only on assumptions, considerations, and marketplace information available as of time of issuance.

40-7 By definition, a substantive conversion feature is at least reasonably possible of being exercised in the future. If the conversion price of an instrument at issuance is extremely high so that conversion of the instrument is not deemed at least reasonably possible as of time of issuance, then the conversion feature would not be considered substantive.

40-8 For purposes of determining whether a conversion feature is reasonably possible of being exercised, the assessment of the holder’s intent is not necessary. Therefore, even if such an instrument included a conversion feature that provided for conversion due solely to the passage of time (for example, the instrument will become convertible at a date before its maturity date), it would be inappropriate to conclude that the conversion feature is substantive. Also, an instrument that became convertible only upon the issuer’s exercise of its call option does not possess a substantive conversion feature.

40-9 Methods that may be helpful in assessing whether a conversion feature is substantive include the following:

The fair value of the conversion feature relative to the fair value of the debt instrument. Comparing the fair value of a conversion feature to the fair value of the debt instrument (that is, the complete instrument as issued) may provide evidence that the conversion feature is substantive.
The effective annual interest rate per the terms of the debt instrument relative to the estimated effective annual rate of a nonconvertible debt instrument with an equivalent expected term and credit risk. Comparing the effective annual interest rate of the debt instrument to the effective annual rate the issuer estimates it could obtain on a similar nonconvertible instrument may provide evidence that a conversion feature is substantive.
The fair value of the debt instrument relative to an instrument that is identical except for which the conversion option is not contingent. Comparing the fair value of the debt instrument to the fair value of an identical instrument for which conversion is not contingent isolates the effect of the contingencies and may provide evidence about the substance of a conversion feature. If the fair value of the debt instrument is similar to the fair value of an identical convertible debt instrument for which conversion is not contingent, then it may indicate that the conversion feature is substantive. However, this approach may not be appropriate unless it is clear that the conversion feature, not considering the contingencies, is substantive.
Qualitative evaluation of the conversion provisions. The nature of the conditions under which the instrument may become convertible may provide evidence that the conversion feature is substantive. For example, if an instrument may become convertible upon the occurrence of a specified contingent event, the likelihood that the contingent event will occur before the instrument’s maturity date may indicate that the conversion feature is substantive. However, this approach may not be appropriate unless it is clear that the conversion feature, not considering the contingencies, is substantive.

40-10 The guidance in paragraphs 470-20-40-7 through 40-9 does not address the treatment of an instrument for purposes of applying Subtopic 260-10.

In evaluating whether a conversion option is substantive as of the debt’s issuance date, an issuer considers the assumptions that were made and the marketplace information that was available as of that date even if the assessment is performed subsequently. A conversion option may be deemed substantive if — as of the instrument’s issuance date — there is at least a reasonable possibility that it will become exercisable by the holder upon (1) the passage of time or (2) the occurrence or nonoccurrence of a specified event (other than the issuer’s exercise of the call option) that is likely to occur. However, in accordance with ASC 470-20-40-7, a conversion option that currently has a reasonable possibility of becoming exercisable would not be considered substantive if, as of the instrument’s issuance date, its exercise was not reasonably possible (e.g., because the conversion option is deeply out-of-the-money).

Under ASC 470-20, a conversion feature would not be considered substantive as of the instrument’s issuance date in any of the following circumstances:

The holder has no ability to exercise the conversion feature (i.e., it is not exercisable) unless the issuer exercises its call option.
It is not reasonably possible for the holder to obtain the ability to exercise the conversion feature (i.e., it is not reasonably possible that the feature will become exercisable) unless the issuer exercises its call option. For example, this would be the case if the only circumstance in which the holder can obtain a right to convert the instrument (other than the issuer’s exercise of the call option) is a specified event that does not have a reasonable possibility of occurring.
It is not reasonably possible that the holder will exercise the conversion feature (e.g., the conversion price is extremely high relative to the current share price as of the issuance date).

In evaluating whether a conversion option is substantive as of the issuance date in accordance with ASC 470-20-40-9 (e.g., when determining whether it is reasonably possible that the holder will exercise the conversion feature), an issuer should consider the following:

The smaller the fair value of the conversion feature relative to the fair value of the debt instrument, the more likely it is that the conversion option is not substantive.
The smaller the difference between the convertible debt’s effective interest rate and the effective interest rate on a hypothetical nonconvertible debt instrument with the same terms except for the conversion feature, the more likely it is that the conversion option is not substantive.
The greater the difference between the fair value of the convertible debt and the fair value of a hypothetical convertible debt instrument with the same terms (except that the conversion feature is not contingent), the more likely it is that the conversion option is not substantive.
The smaller the likelihood of a contingent event that would make the conversion feature exercisable, the more likely it is that the conversion option is not substantive.

12.3.3.3 Illustration

ASC 470-20

Example 9: Illustration of a Conversion of an Instrument That Becomes Convertible Upon the Issuer’s Exercise of a Call Option

55-67 This Example illustrates an instrument subject to the guidance in paragraphs 470-20-40-5 through 40-9.

55-68 An entity issues a contingently convertible instrument on January 1, 2006, with a market price trigger, a $1,000 par amount, and a maturity date of December 31, 2020. The debt instrument is convertible at the option of the holder if the share price of the issuer exceeds a specified amount. The issuer can call the debt at any time between 2009 and the maturity date of the debt. If the issuer calls the debt, the holder has the option to receive cash for the call amount or a fixed number of shares as specified in the terms of the instrument upon issuance, regardless of whether the market price trigger has been met. In 2010, the issuer calls the debt before the market price trigger being met and the holder elects to receive a fixed number of shares (as specified in the terms of the instrument).

Example 9 in ASC 470-20-55 describes a contingently convertible debt instrument (the “CoCo”). Since the holder does not have the ability to convert the CoCo debt before the issuer calls it (because the market price trigger is not met), the transaction is evaluated on the basis of the guidance in ASC 470-20-40-5 on conversions that occur upon the issuer’s exercise of a call option. If the feature had been substantive at issuance, the conversion would have been accounted for as a conversion (see Section 12.3.2). If the feature had been nonsubstantive at issuance, the conversion would have been accounted for as an extinguishment (see Section 9.3).

If the facts were altered so that the market-price trigger had been met when the issuer exercised its call option, the guidance in ASC 470-20-40-5 on conversions that occur upon the issuer’s exercise of a call option would not have applied because the holder already had an unconditional right to elect to convert the debt when the issuer chose to call it. In those circumstances, the conversion would have been accounted for as a conversion irrespective of whether the conversion feature was substantive at issuance.

12.3.4 Induced Conversions

12.3.4.1 Scope

ASC 470-20

05-10 Some convertible debt instruments include provisions allowing the debtor to alter terms of the debt to the benefit of debt holders. In some circumstances, conversion privileges for a convertible debt instrument are changed or additional consideration is paid to debt holders for the purpose of inducing prompt conversion of the debt to equity securities (sometimes referred to as a convertible debt sweetener). Such provisions may be general in nature, permitting the debtor or trustee to take actions to protect the interests of the debt holders, or they may be specific, for example, specifically authorizing the debtor to temporarily reduce the conversion price for the purpose of inducing conversion.

Pending Content (Transition Guidance: ASC 470-20-65-4)

05-10 Some convertible debt instruments include provisions allowing the debtor to alter the terms of the debt to the benefit of debt holders. In some circumstances, conversion privileges for a convertible debt instrument are changed or additional consideration is paid to debt holders for the purpose of inducing prompt conversion of the debt instrument (sometimes referred to as a convertible debt sweetener). Such provisions may be general in nature, permitting the debtor or trustee to take actions to protect the interests of the debt holders, or they may be specific, for example, specifically authorizing the debtor to temporarily reduce the conversion price for the purpose of inducing conversion.

40-13 The guidance in paragraph 470-20-40-16 applies to conversions of convertible debt to equity securities pursuant to terms that reflect changes made by the debtor to the conversion privileges provided in the terms of the debt at issuance (including changes that involve the payment of consideration) for the purpose of inducing conversion. That guidance applies only to conversions that both:

Occur pursuant to changed conversion privileges that are exercisable only for a limited period of time (inducements offered without a restrictive time limit on their exercisability are not, by their structure, changes made to induce prompt conversion)
Include the issuance of all of the equity securities issuable pursuant to conversion privileges included in the terms of the debt at issuance for each debt instrument that is converted, regardless of the party that initiates the offer or whether the offer relates to all debt holders.

Pending Content (Transition Guidance: ASC 470-20-65-4)

40-13 The guidance in paragraph 470-20-40-16 applies to conversions of convertible debt instruments pursuant to terms that reflect changes made by the issuer to the conversion privileges provided in the terms of the existing debt instrument (including changes that involve the payment of consideration) for the purpose of inducing conversion. That guidance applies only to conversions for which all of the following criteria are satisfied:

The conversion occurs pursuant to changed conversion privileges that are exercisable only for a limited period of time (inducements offered without a restrictive time limit on their exercisability are not, by their structure, changes made to induce prompt conversion).
The conversion includes the issuance of all of the consideration (in form and amount) issuable pursuant to conversion privileges provided in the terms of the existing debt instrument for each debt instrument that is converted, regardless of the party that initiates the offer or whether the offer relates to all debt holders. See paragraph 470-20-40-13A for additional guidance applicable to debt instruments whose conversion privileges permit the entity to issue cash (or other assets) or a combination of shares and cash (or other assets) upon conversion. The examples in paragraphs 470-20-55-9A through 55-9J illustrate the application of this guidance.
The existing debt instrument, regardless of whether it is currently convertible, contained a substantive conversion feature as of both the time of issuance and the date the inducement offer is accepted by the convertible debt holder. See paragraphs 470-20-40-6 through 40-10 for additional guidance on determining whether a conversion feature is substantive.

40-13A In applying the guidance in paragraph 470-20-40-13(b), an entity shall compare the amount of cash (or other assets) and number of shares issuable under the conversion privileges provided in the terms of the existing instrument with the amount of cash (or other assets) and number of shares issuable under the inducement offer. An entity shall consider the following:

For purposes of comparing the amount of cash (or other assets) and number of shares issuable, if the settlement terms under either the existing conversion privileges or the inducement offer are based on a future share price or average of future share prices (such as a volume-weighted average price), then an entity shall use the fair value of the shares as of the date the inducement offer is accepted. For example, the incorporation, elimination, or modification of a volume-weighted average price formula that is based on future share prices does not affect the determination of the amount of cash or number of shares issuable for the induced conversion assessment because the fair value of the shares as of the date the inducement offer is accepted would be used instead of the future volume-weighted average price. A future share price refers to a share price measured after the inducement offer is accepted.
Changes that result in the amount of cash (or other assets) and number of shares being indexed to something other than the future price of the issuer’s shares (for example, the fair value of a commodity) shall be considered a change in the form of settlement.
If within the one-year period preceding the date the inducement offer is accepted by the convertible debt holder the existing debt has been exchanged or modified (without being deemed to be substantially different in accordance with the guidance in Subtopic 470-50), then the conversion privileges provided in the debt terms that existed one year before the date the offer is accepted by the convertible debt holder shall be used in place of the conversion privileges provided in the terms of the existing debt instrument.

40-14 A conversion includes an exchange of a convertible debt instrument for equity securities or a combination of equity securities and other consideration, whether or not the exchange involves legal exercise of the contractual conversion privileges included in terms of the debt. The preceding paragraph also includes conversions pursuant to amended or altered conversion privileges on such instruments, even though they are literally provided in the terms of the debt at issuance.

Pending Content (Transition Guidance: ASC 470-20-65-4)

40-14 A conversion includes an exchange of a convertible debt instrument for equity securities or other consideration, whether or not the exchange involves legal exercise of the contractual conversion privileges included in terms of the debt. The guidance in paragraphs 470-20-40-13 through 40-13A also applies to conversions pursuant to amended or altered conversion privileges on such instruments, even though the right to amend the terms is provided in the terms of the existing debt instrument.

40-15 The changed terms may involve any of the following:

A reduction of the original conversion price thereby resulting in the issuance of additional shares of stock
An issuance of warrants or other securities not provided for in the original conversion terms
A payment of cash or other consideration to those debt holders that convert during the specified time period.

The guidance in the following paragraph does not apply to conversions pursuant to other changes in conversion privileges or to changes in terms of convertible debt instruments that are different from those described in this paragraph.

Pending Content (Transition Guidance: ASC 470-20-65-4)

40-15 The changed terms may involve any of the following:

A reduction of the conversion price thereby resulting in the issuance of additional shares of stock
An issuance of warrants or other securities not provided for in the conversion privileges in the terms of the existing instrument
A payment of cash or other consideration to those debt holders that convert during the specified time period.

The guidance in paragraph 470-20-40-16 does not apply to conversions pursuant to other changes in conversion privileges or to changes in terms of convertible debt instruments that are different from those described in this paragraph.

For various reasons, such as to reduce interest costs or improve debt-equity ratios, an issuer may seek to induce debt holders to promptly convert convertible debt into equity shares under changed conversion terms that are effective for a limited period and involve additional consideration. That is, the issuer may make an “inducement offer.” The additional consideration offered can take any form (e.g., reduced conversion price, issuance of warrants or other securities, issuance of other noncash assets, payment of cash).

If convertible debt is converted in accordance with an inducement offer that meets the conditions described above, neither conversion only accounting (as described in Section 12.3.2) nor extinguishment accounting (as described in Section 9.3) applies; instead, the issuer must recognize an inducement expense upon the conversion (as described in Section 12.3.4.2).

Changing Lanes

In November 2024, the FASB issued ASU 2024-04 to clarify the induced conversion guidance in ASC 470-20. The ASU addresses questions from stakeholders related to applying such guidance to convertible debt instruments with cash conversion features (i.e., those that permitted some or all of the consideration issuable upon conversion to be paid in cash). The ASU’s amendments are effective for annual reporting periods beginning after December 15, 2025 (and interim reporting periods within those annual reporting periods). Early adoption is permitted.

The application of induced conversion accounting could change upon an entity’s adoption of ASU 2024-04. Induced conversion accounting applies to conversions that have all of the characteristics in the following table:

Characteristic	ASC References	Applicable Before ASU 2024-04?	Applicable After ASU 2024-04?
The debt’s terms contained a substantive conversion feature as of the time of issuance of the instrument. (The evaluation of whether the conversion feature is substantive is performed by applying the guidance in ASC 470-20-40-5 through 40-9; see Section 12.3.3.)	470-20-40-13(b) 470-20-40-13(c)	Yes	Yes
The debt’s terms contained a substantive conversion feature as of the date the inducement offer was accepted by the holder. (The evaluation of whether the conversion feature is substantive is performed by applying the guidance in ASC 470-20-40-5 through 40-9.)	470-20-40-13(c)	No(a)	Yes
Either the debtor or the holder offered revised conversion terms that gave the holder an economic incentive (a “sweetener”) to convert the instrument early (e.g., a reduced conversion price or additional consideration such as cash or warrants). If the terms were adjusted for some purpose other than to induce conversion (e.g., to settle a legal dispute about the correct interpretation of the conversion terms), induced conversion accounting does not apply.	470-20-40-13(b)	Yes	Yes
The inducement offer contained an exercisability period that was limited (e.g., 30 to 60 days).	470-20-40-13(a)	Yes	Yes
The convertible debt was converted under the revised conversion terms.	470-20-40-13	Yes	Yes
The conversion includes the issuance of all the consideration (in both form and amount) issuable in accordance with the original conversion terms. The form of the consideration issuable under the revised terms must be identical to that issuable under the original terms. The application of this provision depends on the contractual terms of the debt instrument before the conversion occurs in accordance with the amended terms, as follows: Traditional convertible debt instruments — For a convertible debt instrument that must be settled entirely in shares upon conversion, all equity securities that were issuable in accordance with the instrument’s original conversion terms must be issued for each converted instrument (i.e., the conversion can result in the issuance of additional equity shares but cannot result in the issuance of fewer equity shares than the number that must be issued in accordance with the original conversion privileges). Convertible debt instruments with cash conversion features: For a convertible debt instrument whose contractual terms (1) require the accreted value (i.e., principal amount) to be settled in cash and (2) allow the issuer to settle the excess conversion spread in cash or shares (i.e., Instrument C), the conversion consideration payable in accordance with the original conversion terms must include cash equal to the accreted value. The issuer may satisfy the requirement related to the excess conversion spread (determined on the basis of the original conversion terms) in cash or shares but cannot do so by issuing another form of consideration. For a convertible debt instrument whose contractual terms allow the issuer to settle a conversion in any combination of cash or shares (i.e., Instrument X), the conversion consideration payable in accordance with the original conversion terms may include any combination of cash or shares but cannot be satisfied through the issuance of another form of consideration.	470-20-40-13(b)	Yes(b)	Yes
Notes to Table: (a) ASU 2024-04 adds condition (c) to ASC 470-20-40-13, which, upon the ASU’s adoption, clarifies that for induced conversion accounting to apply, the terms of the existing debt must contain a substantive conversion feature as of the date the inducement offer is accepted. While the FASB established this guidance in response to questions raised by constituents about whether induced conversion accounting may be applied to a debt instrument that was not otherwise convertible on the date the inducement offer was made, it applies to all convertible debt instruments. Before the adoption of ASU 2024-04, there is no requirement to evaluate whether the conversion feature in the existing debt instrument is substantive on the date of the inducement offer. (b) ASU 2024-04 clarifies the application of induced conversion accounting to convertible debt instruments with cash conversion features. Before the ASU’s adoption, induced conversion accounting is applied in practice only when (1) the fair value of the consideration transferred exceeds the fair value of the consideration issuable under the original conversion terms and (2) the form of the consideration issuable under the original conversion terms is preserved by the offer. Therefore, before adopting ASU 2024-04, entities apply the principle that the conversion must preserve the form and amount of consideration payable in accordance with the existing conversion terms. However, this practice has resulted in diversity related to how entities evaluate whether the fair value of the consideration issuable under the revised conversion terms at least equaled the fair value of the consideration issuable in accordance with the original conversion terms when the revised conversion terms incorporated, eliminated, or modified a VWAP formula used to calculate the amount of cash or number of shares issuable. ASU 2024-04 addresses this diversity by specifying that, in these situations, an entity should use the fair value of the shares as of the date of the inducement offer to compare the amount of cash or number of shares issuable under the inducement offer with the existing conversion terms. Accordingly, upon the ASU’s adoption, the incorporation, elimination, or modification of a VWAP formula should not preclude the application of induced conversion accounting.

In the evaluation of whether inducement accounting applies, it does not matter whether:

The inducement offer is initiated by the debtor or the holder.
The inducement offer is provided to all holders, some holders, or only one holder of the debt.
Some holders accept the offer and others do not (i.e., inducement accounting applies only to a holder or holders that accept the offer).
The inducement transaction involves the legal exercise of contractual conversion privileges (i.e., the legal form of the inducement transaction does not matter). For example, a repurchase of convertible bonds in the open market may be accounted for as an induced conversion if it involves the issuance of all of the equity securities that were required to be issued under the original conversion terms and the other requirements for inducement accounting are met (e.g., the convertible instrument allowed the issuer to elect to settle a conversion entirely in cash).
The ability to modify the conversion terms to induce conversion was contemplated in the original terms of the debt instrument (i.e., the original terms of the instrument explicitly permit contractual revisions for the purpose of inducing conversion).
The inducement offer involves the issuance of equity securities only or a combination of equity securities and cash or other consideration (as long as the inducement offer preserves the form and amount of consideration issuable under the original conversion terms).
The conversion option is out-of-the-money, at-the-money, or in-the-money (as long as the debt instrument contains a substantive conversion feature).
The holder’s carrying amount of the convertible debt differs from the principal amount.

An entity applies extinguishment accounting (see Section 9.3) to any settlement of convertible debt whose terms are different from the original conversion terms and that does not meet the accounting requirements for induced conversions. Induced conversion accounting can never be applied if the settlement would not have been treated as a conversion, aside from the incremental consideration the issuer provides to the holders. Accordingly, induced conversion accounting would not apply to a convertible debt instrument for which the principal amount must be settled in cash and the excess conversion spread must be settled in equity shares if (1) the principal amount is settled partially or fully in equity shares or (2) the excess conversion spread is settled partially or fully in cash.

Example 12-1

Modification of Conversion Terms That Are Not for a Limited Period

On January 1, 20X1, Entity A issued convertible debt securities that mature in 10 years and allow the holder to convert the securities into A’s common stock at any time before maturity. Entity A accounts for these securities as convertible debt under ASC 470-20-25-12 (i.e., entirely as a liability).

At issuance, the conversion price for each $1,000 principal amount of securities was $10 per share. On March 1, 20X4, A reduces the conversion price to $8 per share, and this revised conversion price remains in effect through maturity. The modification to the conversion price cannot be accounted for as an induced conversion because the changed conversion privileges have no stated expiration date and are available for the remaining term of the convertible debt securities. When conversion terms are altered for the remaining term of a convertible debt instrument, a modification of the convertible debt instrument has occurred that must be accounted for in accordance with the guidance in Chapter 10.

Example 12-2

Change in Nature of Equity Securities Issued Upon Conversion

Entity B has outstanding convertible debt securities that it accounts for as convertible debt under ASC 470-20-25-12 (i.e., entirely as a liability). Upon conversion of the securities, the holder is entitled to 10 shares of common stock for each $1,000 principal amount of securities converted. To induce prompt conversion, B offers all the holders a right, exercisable for the next 30 days, to receive 10 shares of its Series A convertible preferred stock in lieu of receiving 10 shares of common stock. Because the offer involves the issuance of equity securities that are different from those that were issuable under the original conversion terms (i.e., preferred stock instead of common stock), induced conversion accounting cannot be applied for any holders that accept the offer. ASC 470-20-40-13(b) requires that for induced conversion accounting to be applied, the form of consideration issuable under the original conversion terms must be the same as the form of consideration issued under the revised conversion terms. In this example, conversion accounting also does not apply; instead, B should account for any settlements under the offer as extinguishments of debt (see Section 9.3).

12.3.4.2 Recognition and Measurement

ASC 470-20

40-16 If a convertible debt instrument is converted to equity securities of the debtor pursuant to an inducement offer (see paragraph 470-20-40-13), the debtor shall recognize an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms. The fair value of the securities or other consideration shall be measured as of the date the inducement offer is accepted by the convertible debt holder. That date normally will be the date the debt holder converts the convertible debt into equity securities or enters into a binding agreement to do so. Until the debt holder accepts the offer, no exchange has been made between the debtor and the debt holder. Example 1 (see paragraph 470-20-55-1B) illustrates the application of this guidance.

Pending Content (Transition Guidance: ASC 470-20-65-4)

40-16 If a convertible debt instrument is converted pursuant to an inducement offer (see paragraph 470-20-40-13), the issuer shall recognize an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities and other consideration issuable pursuant to the conversion privileges provided in the terms of the existing instrument. The fair value of the securities or other consideration shall be measured as of the date the inducement offer is accepted by the convertible debt holder. That date normally will be the date the debt holder converts the convertible debt or enters into a binding agreement to do so. Until the debt holder accepts the offer, no exchange has been made between the issuer and the debt holder. Example 1 (see paragraph 470-20-55-1B) illustrates the application of this guidance.

40-17 The guidance in the preceding paragraph does not require recognition of gain or loss with respect to the shares issuable pursuant to the original conversion privileges of the convertible debt when additional securities or assets are transferred to a debt holder to induce prompt conversion of the debt to equity securities. In a conversion pursuant to original conversion terms, debt is extinguished in exchange for equity pursuant to a preexisting contract that is already recognized in the financial statements, and no gain or loss is recognized upon conversion.

Pending Content (Transition Guidance: ASC 470-20-65-4)

40-17 The guidance in paragraph 470-20-40-16 does not require recognition of gain or loss with respect to the shares (or other consideration) issuable pursuant to the conversion privileges provided in the terms of the existing convertible debt instrument when additional securities, instruments, or assets are transferred to a debt holder to induce prompt conversion of the existing debt instrument. In a conversion pursuant to the conversion privileges provided in the terms of the existing instrument, debt is settled in exchange for shares, cash (or other assets), or any combination of shares and cash (or other assets) pursuant to a preexisting contract that is already recognized in the financial statements, and no gain or loss is recognized upon conversion.

Under ASC 470-20, when a conversion must be accounted for as an induced conversion, the issuer should recognize an inducement expense equal to the fair value of the consideration transferred (including the fair value of the additional securities issued and that of any other sweetener, such as cash, warrants, or other securities issued) in excess of the fair value of the securities issuable under the original conversion terms. No gain or loss is recognized for the securities that were issuable under the original conversion terms (i.e., conversion accounting applies). Thus, in an induced conversion that involves only the issuance of additional shares, for example, the issuer may make the following accounting entry:

Convertible debt

Debt conversion expense (inducement loss)

Equity — common stock

Although conversions in accordance with changed conversion terms are otherwise accounted for as debt extinguishments, it would be inappropriate to record a debt extinguishment gain or loss related to the shares issuable under the original conversion terms in an induced conversion subject to ASC 470-20-40-13.

The inducement expense is not recognized until the inducement offer is accepted by the convertible debt holder (i.e., the issuer does not recognize the expense as of the date the inducement offer is made).

Similarly, in the calculation of the inducement cost, the fair value of the securities or other consideration transferred as part of the inducement transaction is measured as of the date the inducement offer is accepted by the holder, not as of the date the inducement offer is made. If different holders accept the same offer on different dates, there may be multiple measurement dates.

Because the inducement expense recognized must equal the fair value of the additional securities issued upon conversion regardless of the convertible debt’s net carrying amount and the total fair value of the consideration paid on conversion, some accounting outcomes may be economically counterintuitive. For example, an offer that is settled entirely in cash might result in the recognition of a debt extinguishment gain, whereas an offer of equal economical value that is settled in shares might result in the recognition of an inducement loss. Further, the amount credited to equity to reflect the shares issued may exceed their fair value.

Example 12-3

Recognition of Inducement Loss

Entity C has outstanding convertible bonds that it accounts for as convertible debt under ASC 470-20-25-12 (i.e., entirely as a liability). Their net carrying amount is $1 million. The original conversion price was $20 (i.e., the issuer would deliver 50,000 shares upon conversion). To induce prompt conversion, C reduces the conversion price to $16 for a limited period (i.e., 62,500 shares), and the holders accept the offer. The current stock price is $15. Accordingly, the fair value of the securities issuable under the original conversion terms was $750,000 (50,000 × $15) and the fair value of the securities issuable under the revised conversion terms is $937,500 (62,500 × $15). Because the consideration issuable under the changed conversion privileges exceeds the consideration under the original terms, C recognizes an inducement loss under ASC 470-20 equal to the fair value of the additional shares, $187,500 (12,500 × $15). However, if C had repurchased the shares for a cash payment of $937,500 instead of issuing shares worth $937,500, it would have recognized a debt extinguishment gain of $62,500 ($1,000,000 – $937,500).

12.3.4.3 Additional Illustrations

ASC 470-20

Example 1: Induced Conversions of Convertible Securities

55-1B The following Cases illustrate application of the guidance in paragraph 470-20-40-16 to induced conversions of convertible securities:

Reduced conversion price for conversion before determination date, increase in bond fair value (Case A)
Reduced conversion price for conversion before determination date, decrease in bond fair value (Case B).

Pending Content (Transition Guidance: ASC 470-20-65-4)

55-1B The Cases in paragraphs 470-20-55-3 through 55-9 illustrate application of the guidance in paragraph 470-20-40-16 for measuring an expense when a convertible debt instrument is converted pursuant to an inducement offer:

Reduced conversion price for conversion, increase in bond fair value (Case A)
Reduced conversion price for conversion, decrease in bond fair value (Case B).

55-1C The Cases in paragraphs 470-20-55-9A through 55-9J illustrate application of the guidance in paragraphs 470-20-40-13(b) and 470-20-40-13A for determining whether an inducement offer includes the issuance of all of the consideration (in form and amount) issuable pursuant to conversion privileges provided in the terms of the existing debt instrument:

Offer to settle convertible debt instrument in cash and warrants (Case C)
Offer to settle convertible debt instrument in cash and shares (Case D)
Offer to settle convertible debt instrument in shares and warrants (Case E).

55-2 For simplicity, the face amount of each security is assumed to be equal to its carrying amount in the financial statements (that is, no original issue premium or discount exists).

Case A: Reduced Conversion Price for Conversion Before Determination Date — Bond Fair Value Increased

55-3 On January 1, 19X4, Entity A issues a $1,000 face amount 10 percent convertible bond maturing December 31, 20X3. The carrying amount of the bond in the financial statements of Entity A is $1,000, and it is convertible into common shares of Entity A at a conversion price of $25 per share. On January 1, 19X6, the convertible bond has a fair value of $1,700. To induce convertible bondholders to convert their bonds promptly, Entity A reduces the conversion price to $20 for bondholders that convert before February 29, 19X6 (within 60 days).

Pending Content (Transition Guidance: ASC 470-20-65-4)

Editor’s Note: The heading that precedes paragraph 470-20-55-3 will be amended upon transition as shown below. The content of the paragraph will not change.

Case A: Reduced Conversion Price, Increase in Bond Fair Value

55-4 Assuming the market price of Entity A’s common stock on the date of conversion is $40 per share, the fair value of the incremental consideration paid by Entity A upon conversion is calculated as follows for each $1,000 bond that is converted before February 29, 19X6.

Pending Content (Transition Guidance: ASC 470-20-65-4)

55-4 Assuming the market price of Entity A’s common stock on the date the inducement offer was accepted is $40 per share, the fair value of the incremental consideration that will be paid by Entity A is calculated as follows for each $1,000 bond that is converted before February 29, 19X6.

55-5 Therefore, Entity A records debt conversion expense equal to the fair value of the incremental consideration paid as follows.

Pending Content (Transition Guidance: ASC 470-20-65-4)

55-5 Entity A concludes that it meets all of the criteria in paragraph 470-20-40-13. Therefore, upon conversion, Entity A records debt conversion expense equal to the fair value of the incremental consideration paid as follows.

Case B: Reduced Conversion Price for Conversion Before Determination Date — Bond Fair Value Decreased

55-6 On January 1, 19X1, Entity B issues a $1,000 face amount 4 percent convertible bond maturing December 31, 20X0. The carrying amount of the bond in the financial statements of Entity B is $1,000, and it is convertible into common shares of Entity B at a conversion price of $25. On June 1, 19X4, the convertible bond has a fair value of $500. To induce convertible bondholders to convert their bonds promptly, Entity B reduces the conversion price to $20 for bondholders that convert before July 1, 19X4 (within 30 days).

Pending Content (Transition Guidance: ASC 470-20-65-4)

Case B: Reduced Conversion Price, Decrease in Bond Fair Value

55-7 Assuming the market price of Entity B’s common stock on the date of conversion is $12 per share, the fair value of the incremental consideration paid by Entity B upon conversion is calculated as follows for each $1,000 bond that is converted before July 1, 19X4.

Pending Content (Transition Guidance: ASC 470-20-65-4)

55-7 Assuming the market price of Entity B’s common stock on the date the inducement offer was accepted is $12 per share, the fair value of the incremental consideration that will be paid by Entity B is calculated as follows for each $1,000 bond that is converted before July 1, 19X4.

55-7A Entity B is required to assess whether the criteria in paragraph 470-20-40-13 are met, including whether the conversion feature is substantive (in accordance with the guidance in paragraphs 470-20-40-6 through 40-10) as of both the time of issuance and the date the inducement offer is accepted by the convertible debt holder. If Entity B concludes that, on the basis of its facts and circumstances, all of the criteria in paragraph 470-20-40-13 are met, then it would account for the transaction as illustrated in paragraph 470-20-55-8. If Entity B determines that the criteria in paragraph 470-20-40-13 are not met, it should not account for the settlement transaction as an induced conversion.

55-8 Therefore, Entity B records debt conversion expense equal to the fair value of the incremental consideration paid as follows.

Pending Content (Transition Guidance: ASC 470-20-65-4)

55-8 If Entity B determines that the criteria in paragraph 470-20-40-13 are met, upon conversion, Entity B would record debt conversion expense equal to the fair value of the incremental consideration paid as follows.

55-9 The same accounting would apply if, instead of reducing the conversion price, Entity B issued shares pursuant to a tender offer of 50 shares of its common stock for each $1,000 bond surrendered to the entity before July 1, 19X4. See paragraph 470-20-40-14.

Pending Content (Transition Guidance: ASC 470-20-65-4)

Case C: Offer to Settle Convertible Debt Instrument in Cash and Warrants

55-9A On January 1, 2X24, Entity A issues a $1,000 face amount 10 percent convertible bond maturing December 31, 2X33. The bond has a conversion price of $25 per share. The terms of the existing instrument require that, upon conversion, the issuer settle the principal in cash and the conversion premium in any combination of cash and shares. Under the existing conversion privileges, the total amount of cash (or the total value of the cash and shares) required to be issued upon conversion equals the product of 40 shares per $1,000 bond and a volume-weighted average price of Entity A’s common stock. The volume-weighted average price is calculated over a period of 40 days beginning the day after the holder notifies the issuer that it will convert the debt instrument. On May 15, 2X27, to induce convertible bondholders to convert their bonds promptly, Entity A offers the following consideration in exchange for each $1,000 bond that is converted within 60 days (for purposes of this Example, assume the offer meets the other criteria in paragraph 470-20-40-13 and that the offer is accepted by bondholders on June 1, 2X27):

A cash payment equal to 40 shares multiplied by the volume-weighted average price of Entity A’s common stock calculated over a period of 15 days (beginning the day after the holder accepts the inducement offer)
Five warrants (offered as a sweetener). Each warrant enables the holder to acquire a share of Entity A’s common stock at a fixed exercise price of $40. The warrants are exercisable upon issuance and expire five years after issuance.

55-9B Assume that the fair value of Entity A’s common stock on the date the inducement offer was accepted (June 1, 2X27) is $40 per share. To evaluate whether the inducement offer meets the criterion in paragraph 470-20-40-13(b), Entity A would compare the form and amount of consideration offered with the form and amount of consideration that would be issued upon conversion pursuant to the terms of the existing instrument. The conversion privileges in the existing instrument require Entity A to settle the principal in cash and permit Entity A to settle the conversion premium in any combination of cash and shares.

55-9C In this Case, the inducement offer includes the form (entirely cash) and amount ($1,600) of consideration required to settle both the principal ($1,000) and the conversion premium ($600) pursuant to the conversion privileges provided in the terms of the existing debt instrument. The amount of $1,600 is the product of 40 shares and the fair value of Entity A’s shares at the offer acceptance date ($40).

55-9D The offer of warrants to induce conversion does not affect the assessment of whether the inducement offer includes the form and amount of consideration issuable under the existing conversion privileges because the existing conversion privileges did not provide for the issuance of warrants (however, the offer of warrants as a sweetener affects the measurement of the debt conversion expense recognized in accordance with paragraph 470-20-40-16). Similarly, the fact that the inducement offer changes the number of days over which the volume-weighted average price of Entity A’s shares is measured does not affect whether the inducement offer includes the amount of consideration issuable under the existing conversion privileges because Entity A would use the fair value of its common stock as of the offer acceptance date to calculate the amount of cash payable under both the conversion privileges in the existing instrument and the inducement offer in accordance with paragraph 470-20-40-13A(a). Therefore, the inducement offer satisfies the criterion in paragraph 470-20-40-13(b).

Case D: Offer to Settle Convertible Debt Instrument in Cash and Shares

55-9E Assume the same facts as Case C, except that Entity A offers the following consideration (instead of the consideration listed in paragraph 470-20-55-9A):

A cash payment of $1,400
Ten shares of Entity A’s common stock.

55-9F To evaluate whether the inducement offer meets the criterion in paragraph 470-20-40-13(b), Entity A would compare the form and amount of consideration offered with the form and amount of consideration that would be issued upon conversion pursuant to the terms of the existing instrument. The conversion privileges in the terms of the existing instrument require Entity A to settle the principal in cash and permit Entity A to settle the conversion premium in any combination of cash and shares.

55-9G In this Case, the inducement offer includes the form (cash) and amount ($1,000) of consideration required to settle the principal pursuant to the conversion privileges provided in the terms of the existing debt instrument. Under the existing conversion privileges, the remaining settlement value of $600 can be settled in any combination of cash and shares. If $400 ($1,400 total cash payment − $1,000 principal) of the conversion premium is settled in cash, then the inducement offer must provide for at least 5 shares ($200 remaining conversion premium ÷ $40 share price) of Entity A’s common stock to provide the same form (cash and shares) and at least the same amount of cash and shares that would have been provided under the conversion privileges of the existing instrument. Because the inducement offer illustrated in Case D includes 10 shares, it would satisfy the criterion in paragraph 470-20-40-13(b). The fact that the inducement offer eliminates the volume-weighted average price formula contained in the existing conversion privileges and instead offers a specified amount of cash and shares does not affect whether the inducement offer includes the amount of consideration issuable under the existing conversion privileges because Entity A would use the fair value of its common stock as of the offer acceptance date to calculate the amount of cash payable and shares issuable under the conversion privileges in the existing instrument in accordance with paragraph 470-20-40-13A(a).

Case E: Offer to Settle Convertible Debt Instrument in Shares and Warrants

55-9H Assume the same facts as in Case C, except that Entity A offers the following consideration (instead of the consideration listed in paragraph 470-20-55-9A):

Forty shares of Entity A’s common stock
Five warrants (offered as a sweetener). Each warrant enables the holder to acquire a share of Entity A’s common stock at a fixed exercise price of $40. The warrants are exercisable upon issuance and expire five years after issuance.

55-9I To evaluate whether the inducement offer meets the criterion in paragraph 470-20-40-13(b), Entity A would compare the form and amount of consideration offered with the form and amount of consideration that would be issued upon conversion pursuant to the terms of the existing instrument. The conversion privileges in the terms of the existing instrument require Entity A to settle the principal in cash and permit Entity A to settle the conversion premium in any combination of cash and shares.

55-9J In contrast to Case C and Case D, the inducement offer does not include the issuance of all the consideration (in form and amount) issuable pursuant to the conversion privileges included in the terms of the existing instrument. The terms of the existing instrument require settlement of the principal amount in cash, but Entity A did not offer cash consideration in the inducement offer. Therefore, Entity A would conclude that the criterion in paragraph 470-20-40-13(b) is not satisfied.

Footnotes

As noted in Section 12.2, conversion accounting does not apply in certain circumstances in which a debt instrument is settled for the issuer’s equity shares in accordance with the original conversion privileges.

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.