13.10 Convertible Debt
ASC 470-20
45-1B The guidance on
convertible debt instruments in this Subtopic does not
affect an issuer’s determination of whether the instruments
should be classified as a current liability or a long-term
liability. For purposes of applying other applicable U.S.
generally accepted accounting principles (GAAP) to make that
determination, all terms of the convertible debt instrument
shall be considered.
Nonauthoritative AICPA Guidance
Technical Q&As Section 1100, “Statement of Financial
Position”
.14 Classification of Convertible Debt
Inquiry — A company has debt that is convertible into
common stock of the company at the option of the company.
The debt by its terms is considered long-term debt in the
classified balance sheet. The company intends to call the
debt and issue the common stock within one year of the
balance sheet date. Should this debt be classified as a
current liability?
Reply — No. The expected call of the debt securities
will not consume current assets or increase current
liabilities, and accordingly should continue to be
classified as a long-term obligation.
The general principle underlying the classification of debt
in a debtor’s principal balance sheet should be based on
facts existing at the date of the balance sheet rather than
on expectations. According to FASB Accounting Standards
Codification (ASC) glossary, the term current
liabilities “is used principally to designate
obligations whose liquidation is reasonably expected to
require the use of existing resources properly classifiable
as current assets, or the creation of other current
liabilities.” . . .
The classification of convertible debt as current or noncurrent depends on the terms
of the debt. Current liabilities generally include convertible debt obligations for
which payment of cash or other current assets or the creation of current liabilities
could be required within one year (or the operating cycle, if longer) after the
balance sheet date. Unless debt has met the requirements related to short-term
obligations expected to be refinanced on a long-term basis (see Section 13.7), current classification is necessary for:
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Convertible debt that is scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.3).
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Any portion of long-term convertible debt that is scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (e.g., the current portion of an amortizing long-term debt obligation for which the principal amount is paid down over the obligation’s life; see Section 13.3).
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Convertible debt that is repayable on demand or puttable by the holder within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.4), including convertible debt that is contingently puttable if the contingency has been met.
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Long-term convertible debt that became repayable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation that occurred as of the balance sheet date or before the financial statements were issued or available to be issued (see Section 13.5). Note that the issuer should consider whether either of the exceptions for covenant waivers and grace periods is applicable (see Section 13.5.3).
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The cash-settled portion of debt that is convertible at any time or within one year (or the operating cycle, if longer) after the balance sheet date if the issuer is or could be required to settle all or part of the conversion value in cash upon conversion (e.g., Instrument A and Instrument C; see Section 2.3.2.2). Such debt is treated as debt that is repayable on demand (see Section 13.4) even if the conversion option is out-of-the-money.
Generally, the holder’s conversion option does not affect the classification of
convertible debt as current or noncurrent if it must be settled by the delivery of
the issuer’s equity shares (see Section
13.3.3.4).