Chapter 14 — Presentation, Disclosure, and Other Considerations

14.4 Disclosure

14.4.1 Significant Debt Terms

ASC 470-10

50-5 Paragraph 505-10-50-3 requires that an entity explain, in summary form within its financial statements, the pertinent rights and privileges of various securities outstanding.

ASC 505-10

50-3 An entity shall explain, in summary form within its financial statements, the pertinent rights and privileges of the various securities outstanding. Examples of information that shall be disclosed are dividend and liquidation preferences, participation rights, call prices and dates, conversion or exercise prices or rates and pertinent dates, sinking-fund requirements, unusual voting rights, and significant terms of contracts to issue additional shares or terms that may change conversion or exercise prices (excluding standard antidilution provisions). An entity shall disclose within its financial statements the number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented. An entity also shall disclose within the financial statements actual changes to conversion or exercise prices that occur during the reporting period (excluding changes due to standard antidilution provisions).

For each debt instrument outstanding, a debtor is required to disclose summary information about the rights and privileges (i.e., significant terms) of each debt instrument outstanding, such as participation rights, call prices and dates, and sinking fund requirements. (Disclosures about equity conversion terms are addressed in Section 14.4.9.)

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 5-02, Balance Sheets [Reproduced in ASC 210-10-S99-1]

The purpose of this rule is to indicate the various line items and certain additional disclosures which, if applicable, and except as otherwise permitted by the Commission, should appear on the face of the balance sheets or related notes filed for the persons to whom this article pertains (see § 210.4-01(a)). . . .

22. Bonds, mortgages and other long-term debt, including capitalized leases.

(a) State separately, in the balance sheet or in a note thereto, each issue or type of obligation and such information as will indicate:

(1) The general character of each type of debt including the rate of interest;

(2) the date of maturity, or, if maturing serially, a brief indication of the serial maturities, such as “maturing serially from 1980 to 1990”;

(3) if the payment of principal or interest is contingent, an appropriate indication of such contingency;

(4) a brief indication of priority; and

(5) if convertible, the basis. For amounts owed to related parties, see § 210.4-08(k). . . .

SEC registrants must disclose the following information for each issue or type of obligation of bonds, mortgages, and other long-term debt either on the face of the balance sheet or in a note:

The general character of each debt type.
The interest rate.
The maturity date or, for serial-maturity debt (e.g., amortizing debt), the serial maturity period.
An indication of any contingency associated with the payment of principal or interest (e.g., additional interest contingent upon an event of default or delayed filings).
Priority (e.g., senior or subordinated debt).
If applicable, conversion terms.

14.4.2 Face Amount and Effective Interest Rate

ASC 835-30

45-1 The guidance in this Section does not apply to the amortization of premium and discount of assets and liabilities that are reported at fair value and the debt issuance costs of liabilities that are reported at fair value.

45-1A The discount or premium resulting from the determination of present value in cash or noncash transactions is not an asset or liability separable from the note that gives rise to it. Therefore, the discount or premium shall be reported in the balance sheet as a direct deduction from or addition to the face amount of the note. Similarly, debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note. The discount, premium, or debt issuance costs shall not be classified as a deferred charge or deferred credit.

45-2 Paragraph 835-30-45-1A provides requirements for the balance sheet presentation for the discount or premium and debt issuance costs of a note. The description of the note shall include the effective interest rate. The face amount of the note also shall be presented in the financial statements or disclosed in the notes to financial statements. (See paragraph 835-30-50-1.)

For each debt instrument outstanding, a debtor must provide the following information either in the notes or on the face of the financial statements:

The face amount (i.e., the stated principal amount).
The effective interest rate that is used for accounting purposes (see Section 6.2.3.3).

The debt’s face amount may differ from its net carrying amount because the debt was issued at a discount or premium (see Chapter 4), the debtor incurred debt issuance costs (see Chapter 5), or the debt proceeds were attributable to multiple units of account, such as debt with detachable warrants (see Chapter 3). ASC 835-30-45-1A requires discounts, premiums, or issuance costs to be presented as a direct deduction or addition to the amount on the face of the balance sheet. In the income statement, the debtor reports the amortization of discounts, premiums, and issuance costs as interest expense (see ASC 835-30-45-3). However, the guidance in ASC 835-30-45 on the amortization of discounts, premiums, and issuance costs does not apply to debt reported at fair value, such as debt reported under the fair value option in ASC 815-15 or ASC 825-10 (see ASC 835-30-45-1).

ASC 835-30

Example 2: Balance Sheet Presentation of Discounted Notes

55-8 This Example is an illustration of the guidance in paragraphs 835-30-45-1 through 45-3 related to the balance sheet presentation of notes that are discounted.

Note 1 — Long-Term Debt

Long-term debt at December 31, 20X2, consisted of the following:

ASC 835-30-55-8 illustrates the presentation and disclosure of (1) a noninterest bearing note receivable with an imputed discount and (2) long-term debt issued at a discount and for which debt issuance costs were incurred. The illustration shows how the discount and issuance costs related to a debt instrument may be presented either in the line item caption for the debt or broken out as a separate amount on the face of the balance sheet. Further, it displays how the notes may show a breakdown of individual debt instruments along with their amounts of debt discounts and issuance costs when the balance sheet line item includes multiple debt instruments. If a debt instrument was issued at a premium instead of a discount, the related descriptions would be amended accordingly.

14.4.3 Pledged Assets and Restrictive Debt Covenants

ASC 440-10

50-1 Notwithstanding more explicit disclosures required elsewhere in this Codification, all of the following situations shall be disclosed in financial statements: . . .

c. Assets pledged as security for loans . . .

f. Commitments, including: . . .

2. An obligation to reduce debts

3. An obligation to maintain working capital

4. An obligation to restrict dividends.

Nonauthoritative AICPA Guidance

Technical Q&As Section 3500, “Commitments”

.06 Covenants Imposed by Loan Agreements

Inquiry — Restrictive covenants under certain loan agreements of Company A require the Company to maintain a special level of working capital, reduce the amount of its debts, and restrict the amount of retained earnings available for dividend payments. Should the restrictive covenants be disclosed?

Reply — FASB ASC 440-10-50-1 requires the disclosure of restrictive covenants.

A debtor is required to disclose information about assets pledged as collateral for debt and restrictive debt covenants, such as commitments to maintain a specific amount of working capital (see Section 13.3.3.2), reduce the amount of debt, or restrict dividend payments (e.g., provisions that prevent the payment of dividends on common or preferred stock).

14.4.4 Weighted Average Interest Rate on Short-Term Borrowings

ASC 470-10

15-1 The guidance in this Subtopic applies to all entities.

Pending Content (Transition Guidance: ASC 105-10-65-7)

15-1 The guidance in this Subtopic applies to all entities, excluding paragraph 470-10-50-7, which applies to public business entities only.

50-7 A public business entity shall disclose the weighted-average interest rate on short-term borrowings outstanding as of the date of each balance sheet presented.

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 5-02, Balance Sheets [Reproduced in ASC 210-10-S99-1]

19. Accounts and notes payable. . . .

(b) . . . The weighted average interest rate on short term borrowings outstanding as of the date of each balance sheet presented shall be furnished in a note. . . .

SEC Rules, Regulations, and Interpretations

FRR 203.01. Reasons for Requirements (ASR 148)

The management of liquidity is an important part of the financial management of a business entity. The maintenance of short-term borrowing capacity and the ability to obtain such funds at reasonable cost are major elements of such a management responsibility. If investors are to understand the financial policies of management, disclosure relative to these elements is necessary. . . .

The interest paid for short-term borrowings is . . . of significance in appraising the financial policies and operating results of business entities. Changes in this rate over time may have a significant impact on profitability. The relationship of the rate paid at year end to short-term rates generally being charged at that date to corporate borrowers may be indicative of the future level of interest costs to be incurred by the corporation under varying conditions in the credit markets. In addition, information as to the magnitude of such borrowings during a fiscal period should further assist investors in determining the impact of changing credit conditions on business operations.

SEC registrants must disclose in a note the weighted average interest rate on short-term borrowings outstanding as of each balance sheet date.

14.4.5 Defaulted Debt, Covenant Violations, and Waivers

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 4-08, General Notes to Financial Statements [Reproduced in ASC 235-10-S99-1]

If applicable to the person for which the financial statements are filed, the following shall be set forth on the face of the appropriate statement or in appropriately captioned notes. The information shall be provided for each statement required to be filed, except that the information required by paragraphs (b), (c), (d), (e) and (f) of this section shall be provided as of the most recent audited balance sheet being filed and for paragraph (j) of this section as specified therein. When specific statements are presented separately, the pertinent notes shall accompany such statements unless cross-referencing is appropriate. . . .

(c) Defaults. The facts and amounts concerning any default in principal, interest, sinking fund, or redemption provisions with respect to any issue of securities or credit agreements, or any breach of covenant of a related indenture or agreement, which default or breach existed at the date of the most recent balance sheet being filed and which has not been subsequently cured, shall be stated in the notes to the financial statements. If a default or breach exists but acceleration of the obligation has been waived for a stated period of time beyond the date of the most recent balance sheet being filed, state the amount of the obligation and the period of the waiver. . . .

SEC registrants must disclose information about:

Debt in default, including “the facts and amounts concerning any default in principal, interest, sinking fund, or redemption provisions.”
Covenant violations, including “any breach of covenant of a related indenture or agreement, which default or breach existed at the date of the most recent balance sheet being filed and which has not been subsequently cured.”
Waivers of defaults and covenant violations, including “the amount of the obligation and the period of the waiver.”

14.4.6 Five-Year Table of Debt Maturities

ASC 470-10

50-1 The combined aggregate amount of maturities and sinking fund requirements for all long-term borrowings shall be disclosed for each of the five years following the date of the latest balance sheet presented. (See paragraph 505-10-50-11 for related disclosure guidance on redeemable securities.) See Example 3 (paragraph 470-10-55-10) for an illustration of this disclosure requirement.

50-2 If an obligation under paragraph 470-10-45-11(b) is classified as a long-term liability (or, in the case of an unclassified balance sheet, is included as a long-term liability in the disclosure of debt maturities), the circumstances shall be disclosed.

Example 3: Disclosure of Long-Term Obligations

55-10 This Example provides an illustration of the guidance in paragraph 470-10-50-1 for disclosures for long-term borrowings and preferred stock with mandatory redemption requirements. This Example has the following assumptions.

55-11 Entity D has outstanding two long-term loans, one convertible debt, and one issue of preferred stock with mandatory redemption requirements. The first loan is a $100 million sinking fund debenture with annual sinking fund payments of $10 million in 19X2, 19X3, and 19X4, $15 million in 19X5 and 19X6, and $20 million in 19X7 and 19X8. The second loan is a $50 million note due in 19X5. The convertible debt has a principal amount of $70 million that is not convertible before maturity in 19X9. This convertible debt requires a 2 percent annual cumulative sinking fund payment of $1.4 million until settled. The $30 million issue of preferred stock requires a 5 percent annual cumulative sinking fund payment of $1.5 million until retired.

55-12 Entity D’s disclosure might be as follows.

Maturities and sinking fund requirements on long-term loans and convertible debt and sinking fund requirements on preferred stock subject to mandatory redemption are as follows (in thousands).

Nonauthoritative AICPA Guidance

Technical Q&As Section 3200, “Long-Term Debt”

.15 Disclosure of Five-Year Maturities on Long-Term Debt

Inquiry — A company entered into a 10-year loan agreement with a lender. The mortgage note contains a variable interest rate based on prime plus one percent. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 440, Commitments, the company will disclose the maturities on the debt for each of the next five succeeding years. Should the disclosure include principal and interest?

Reply — No. The required disclosure of the amount of scheduled repayments for each of the five succeeding fiscal years relates only to principal repayments and should not include interest. Disclosure is also called for when interest rates vary with the prime rate.

A debtor is required to disclose the aggregate amount of maturities (i.e., principal repayments) of long-term debt during each of the five annual periods after the balance sheet date (ASC 470-10-50-1 and 470-10-55-12). The amounts disclosed do not include interest payments (AICPA Technical Q&As Section 3200.15).

If a debtor has included a long-term obligation in the table of maturities of long-term obligation in the following scenario, it must disclose the circumstances (ASC 470-10-50-2; see also Section 13.5.4):

The debtor has violated a provision of the debt.
The debt will become repayable on demand if the debtor does not cure the violation within a specified grace period.
It is probable that the debtor will cure the violation within the grace period.

14.4.7 Significant Changes in Outstanding Debt

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 4-08, General Notes to Financial Statements [Reproduced in ASC 235-10-S99-1]

(f) Significant changes in bonds, mortgages and similar debt. Any significant changes in the authorized or issued amounts of bonds, mortgages and similar debt since the date of the latest balance sheet being filed for a particular person or group shall be stated.

SEC registrants must disclose information about significant changes in the authorized or outstanding amount of bonds, mortgages, and similar debt since the most recent balance sheet date.

14.4.8 Unused Lines of Credit and Other Loan Commitments

ASC 440-10

50-1 Notwithstanding more explicit disclosures required elsewhere in this Codification, all of the following situations shall be disclosed in financial statements:

Unused letters of credit . . . .

ASC 470-10

Pending Content (Transition Guidance: ASC 105-10-65-7)

50-6 An entity shall separately disclose the following in the notes to financial statements:

The amount and terms of unused commitments for long-term financing arrangements (including commitment fees and the conditions under which commitments may be withdrawn)
The amount and terms of unused lines of credit for short-term financing arrangements (including commitment fees and the conditions under which lines may be withdrawn) and the amount of those lines of credit that support commercial paper borrowing arrangements or similar arrangements.

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 5-02, Balance Sheets [Reproduced in ASC 210-10-S99-1]

19. Accounts and notes payable. . . .

(b) The amount and terms (including commitment fees and the conditions under which lines may be withdrawn) of unused lines of credit for short-term financing shall be disclosed, if significant, in the notes to the financial statements. The weighted average interest rate on short term borrowings outstanding as of the date of each balance sheet presented shall be furnished in a note. The amount of these lines of credit which support a commercial paper borrowing arrangement or similar arrangements shall be separately identified. . . .

22. Bonds, mortgages and other long-term debt, including capitalized leases. . . .

(b) The amount and terms (including commitment fees and the conditions under which commitments may be withdrawn) of unused commitments for long-term financing arrangements that would be disclosed under this rule if used shall be disclosed in the notes to the financial statements if significant. . . .

SEC Rules, Regulations, and Interpretations

FRR 203.04. Unused Lines of Credit or Commitments (ASR 148)

Rules 5-02.19 and 5-02.22 of Regulation S-X . . . call for the disclosure of the amount and terms of unused lines of credit and commitments if significant. Various factors should be considered in determining significance such as total debt by term of such debt, total capital, total cash requirements, and the like.

The disclosure of unused lines and commitments supplies the investor with information regarding borrowing potential and future liquidity under varying money market conditions. It is recognized that lines of credit or commitments are frequently extended to a borrower subject to the condition that the borrower maintain certain standards of credit worthiness, and that the existence of such lines or commitments therefore does not assure the availability of credit under conditions of deteriorating financial position. Accordingly, the rule provides that disclosure be made of the conditions under which lines or commitments may be withdrawn. It is also recognized that such lines and commitments are occasionally offered by financial institutions as a marketing device and accepted by corporations without any intention of use and not as part of their financing plan. Disclosure of such lines is not contemplated by this rule.

Unused lines disclosed as supporting commercial paper or other debt arrangements should include only usable lines. For this purpose usable lines are construed to be total lines used to support commercial paper less lines needed to meet “clean-up” provisions of a borrowing arrangement. Such provisions require borrowers to retire credit extended at a bank or banks at some specified interval for a specified period. Total lines outstanding are therefore not necessarily a measure of the total credit available on a continuing basis. Similarly, if a corporation has lines arranged with several banks which in total exceed borrowing levels permitted under existing lending agreements, disclosure should be limited to usable amounts.

Rule 5-02.22 would include disclosure of commitments such as standby commitments, commitments for future disbursements, and unused revolving credits maturing after one year.

Nonauthoritative AICPA Guidance

Technical Q&As Section 3500, “Commitments”

.07 Disclosure of Unused Lines of Credit

Inquiry — Should nonpublic companies disclose the existence of unused lines of credit that are available as of the balance sheet date?

Reply — Although public companies are required [pursuant to SEC Regulation S-X, section 210.5-02.19(b)] to disclose significant unused lines of credit for short-term financing in the notes, there is no such explicit requirement for nonpublic companies under generally accepted accounting principles. However, under certain circumstances, disclosure by nonpublic companies may be advisable based on the general principle of adequate disclosure.

The notes, as well as the financial statements, should be informative of matters that may affect their use, understanding, and interpretation.

Under ASC 440-10-50-1(a) and ASC 470-10-15-6, respectively, all entities must disclose unused letters of credit and certain information about unused commitments and lines of credit. In addition, Regulation S-X, Rule 5-02, requires SEC registrants to disclose the “amount and terms (including commitment fees and the conditions under which lines may be withdrawn)” of significant unused (1) lines of credit for short-term financing and (2) commitments for long-term financing arrangements, such as “standby commitments, commitments for future disbursements, and unused revolving credits maturing after one year.” FRR 203.04 indicates that an entity should consider “various factors . . . in determining significance such as total debt by term of such debt, total capital, total cash requirements.” Lines of credit that “support a commercial paper borrowing arrangement or similar arrangements” must be identified separately. The purpose of the requirement to disclose the conditions under which lines of credit and other commitments may be drawn is to help investors assess “the availability of credit under conditions of deteriorating financial position” (e.g., whether the availability of the commitment depends on the entity’s creditworthiness).

14.4.9 Convertible Debt

14.4.9.1 General

ASC 470-20

50-1A The objective of the disclosure about convertible debt instruments is to provide users of financial statements with:

Information about the terms and features of convertible debt instruments
An understanding of how those instruments have been reported in an entity’s statement of financial position and statement of financial performance
Information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments.

50-1B An entity shall explain the pertinent rights and privileges of each convertible debt instrument outstanding, including, but not limited to, the following information:

Principal amount
Coupon rate
Conversion or exercise prices or rates and number of shares into which the instrument is potentially convertible
Pertinent dates, such as conversion date(s) and maturity date
Parties that control the conversion rights
Manner of settlement upon conversion and any alternative settlement methods, such as cash, shares, or a combination of cash and shares
Terms that may change conversion or exercise prices, number of shares to be issued, or other conversion rights and the timing of those rights (excluding standard antidilution provisions)
Liquidation preference and unusual voting rights, if applicable
Other material terms and features of the instrument that are not listed above.

50-1C An entity shall provide the following incremental information for contingently convertible instruments or the instruments that are described in paragraphs 470-20-05-8 through 05-8A:

Events or changes in circumstances that would adjust or change the contingency or would cause the contingency to be met
Information on whether the shares that would be issued if the contingently convertible securities were converted are included in the calculation of diluted earnings per share (EPS) and the reasons why or why not
Other information that is helpful in understanding both the nature of the contingencies and the potential impact of conversion.

50-1D An entity shall disclose the following information for each convertible debt instrument as of each date for which a statement of financial position is presented.

The unamortized premium, discount, or issuance costs and, if applicable, the premium amount recorded as paid-in capital in accordance with paragraph 470-20-25-13
The net carrying amount
For public business entities, the fair value of the entire instrument and the level of the fair value hierarchy in accordance with paragraphs 825-10-50-10 through 50-15.

See Example 11 (paragraph 470-20-55-69A) for an illustration of this disclosure requirement.

50-1E An entity shall disclose the following information as of the date of the latest statement of financial position presented:

Changes to conversion or exercise prices that occur during the reporting period other than changes due to standard antidilution provisions
Events or changes in circumstances that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed
Number of shares issued upon conversion, exercise, or satisfaction of required conditions during the reporting period
Maturities and sinking fund requirements for convertible debt instruments for each of the five years following the date of most recent statement of financial position presented in accordance with paragraph 470-10-50-1.

50-1F An entity shall disclose the following information about interest recognized for each period for which a statement of financial performance is presented:

The effective interest rate for the period
The amount of interest recognized for the period disaggregated by both of the following (see Example 12 [paragraph 470-20-55-69D] for an illustration of this disclosure requirement):
1. The contractual interest expense
2. The amortization of the premium, discount, or issuance costs.

50-1G If the conversion option of a convertible debt instrument is accounted for as a derivative in accordance with Subtopic 815-15, an entity shall provide disclosures in accordance with Topic 815 for the conversion option in addition to the disclosures required by this Section, if applicable.

50-1H If a convertible debt instrument is measured at fair value in accordance with the Fair Value Option Subsections of Subtopic 825-10, an entity shall provide disclosures in accordance with Subtopic 820-10 and Subtopic 825-10 in addition to the disclosures required by this Section, if applicable.

50-1I An entity shall disclose the following information about derivative transactions entered into in connection with the issuance of convertible debt instruments within the scope of this Subtopic regardless of whether such derivative transactions are accounted for as assets, liabilities, or equity instruments:

The terms of those derivative transactions (including the terms of settlement)
How those derivative transactions relate to the instruments within the scope of this Subtopic
The number of shares underlying the derivative transactions
The reasons for entering into those derivative transactions.

An example of a derivative transaction entered into in connection with the issuance of a convertible debt instrument within the scope of this Subtopic is the purchase of call options that are expected to substantially offset changes in the fair value or the potential dilutive effect of the conversion option. Derivative instruments also are subject to the disclosure guidance in Topic 815.

Example 11: Disclosure of the Information in the Statement of Financial Position

55-69A This Example provides an illustration of the guidance in paragraph 470-20-50-1D based on the assumption that Entity A is a public business entity and has two convertible debt instruments outstanding as of December 31, 20X7, and 20X6.

55-69B The following illustrates the disclosures in a tabular format.

The following is a summary of Entity A’s convertible debt instruments as of December 31, 20X7 (in thousands).

The following is a summary of Entity A’s convertible debt instruments as of December 31, 20X6 (in thousands).

55-69C The disclosures may be provided alternatively in narrative descriptions.

1.2 Percent Convertible Debt Instrument Due on December 31, 20X8

As of December 31, 20X7, and 20X6, the net carrying amount of the convertible debt instrument was $982,000 and $965,000, respectively, with unamortized debt discount and issuance costs of $18,000 and $35,000. The estimated fair value (Level 2) of the convertible debt instrument was $1,100,000 and $1,015,000, respectively, as of December 31, 20X7, and 20X6.

Zero-Coupon Convertible Debt Instrument Due on December 31, 20X9

As of December 31, 20X7, and 20X6, the net carrying amount of the convertible debt instrument was $491,000 and $486,000, respectively, with unamortized debt discount and issuance costs of $9,000 and $14,000. The estimated fair value (Level 3) of the convertible debt instrument was $462,000 and $450,000, respectively, as of December 31, 20X7, and 20X6.

Example 12: Disclosure of the Information in the Statement of Financial Performance

55-69D This Example provides an illustration of the guidance in paragraph 470-20-50-1F(b) based on the assumption that Entity A has two convertible debt instruments issued before January 1, 20X5, and still outstanding as of December 31, 20X7.

55-69E The following illustrates the disclosures in a tabular format.

The following provides a summary of the interest expense of Entity A’s convertible debt instruments (in thousands).

55-69F The disclosures may be provided alternatively in narrative descriptions.

For the years ended December 31, 20X7, 20X6, and 20X5, the total interest expense was $34,000, $34,000, and $33,000 with coupon interest expense of $12,000 for each year and the amortization of debt discount and issuance costs of $22,000, $22,000, and $21,000, respectively.

ASC 470-20 requires an entity to provide detailed disclosures about outstanding convertible debt instruments, including certain information related to the following:

Significant terms and features, with specific disclosures for contingently convertible debt instruments (see ASC 470-20-50-1B and 50-1C).
Carrying amounts and fair value amounts (public business entities only) as of each balance sheet date (see ASC 470-20-50-1D).
Information about conversion terms, shares issued, and cash flow requirements as of the latest balance sheet date (see ASC 470-20-50-1E).
Interest amounts for each income statement (see ASC 470-20-50-1F).
Information about bifurcated conversion features (see ASC 470-20-50-1G and ASC 815-15-50).
Fair value information for convertible debt instruments measured at fair value through earnings (see ASC 470-20-50-1H and Section 14.4.10).
Derivative transactions executed in conjunction with convertible debt issuances (e.g., capped call and call spread transactions; see ASC 470-20-50-1I).

14.4.9.2 Own-Share Lending Arrangements

ASC 470-20

50-2A An entity that enters into a share-lending arrangement on its own shares in contemplation of a convertible debt offering or other financing shall disclose all of the following. The disclosures must be made on an annual and interim basis in any period in which a share-lending arrangement is outstanding.

A description of any outstanding share-lending arrangements on the entity’s own stock
All significant terms of the share-lending arrangement including all of the following:
1. The number of shares
2. The term
3. The circumstances under which cash settlement would be required
4. Any requirements for the counterparty to provide collateral.
The entity’s reason for entering into the share-lending arrangement
The fair value of the outstanding loaned shares as of the balance sheet date
The treatment of the share-lending arrangement for the purposes of calculating earnings per share
The unamortized amount of the issuance costs associated with the share-lending arrangement at the balance sheet date
The classification of the issuance costs associated with the share-lending arrangement at the balance sheet date
The amount of interest cost recognized relating to the amortization of the issuance cost associated with the share-lending arrangement for the reporting period
Any amounts of dividends paid related to the loaned shares that will not be reimbursed.

50-2B An entity that enters into a share-lending arrangement on its own shares in contemplation of a convertible debt offering or other financing shall also make the disclosures required by Topic 505.

50-2C In the period in which an entity concludes that it is probable that the counterparty to its share-lending arrangement will default, the entity shall disclose the amount of expense reported in the statement of earnings related to the default. The entity shall disclose in any subsequent period any material changes in the amount of expense as a result of changes in the fair value of the entity’s shares or the probable recoveries. If default is probable but has not yet occurred, the entity shall disclose the number of shares related to the share-lending arrangement that will be reflected in basic and diluted earnings per share when the counterparty defaults.

Own-share lending arrangements are initially recognized as a debt issuance cost, with an offset to APIC. Under ASC 835-30-45-1A, debt issuance costs are reported as a direct deduction from the par amount of the debt on the face of the balance sheet. They are not classified as a deferred charge.

ASC 470-20 provides disclosure requirements for own-share lending arrangements executed in contemplation of a convertible debt offering or other financing. These requirements supplement the general guidance in ASC 505-10 on the issuer’s disclosure of information about securities.

14.4.10 Fair Value Information

ASC 825-10

50-2A The disclosure guidance in this Subsection applies to public business entities . . . .

50-8 In part, this Subsection requires disclosures about fair value for all financial instruments, whether recognized or not recognized in the statement of financial position, except that the disclosures about fair value prescribed in paragraphs 825-10-50-10 through 50-13 and 825-10-50-15 are not required for any of the following: . . .

b. Substantively extinguished debt subject to the disclosure requirements of Subtopic 405-20 . . .

m. Trade receivables and payables due in one year or less

n. Deposit liabilities with no defined or contractual maturities

o. Liabilities resulting from the sale of prepaid stored-value products within the scope of paragraph 405-20-40-3.

50-9 Generally accepted accounting principles (GAAP) require disclosure of or subsequent measurement at fair value for many classes of financial instruments. Those requirements are not superseded or modified by this Subsection.

50-10 A reporting entity shall disclose either in the body of the financial statements or in the accompanying notes, the fair value of financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3). . . .

For financial instruments recognized at fair value in the statement of financial position, the disclosure requirements of Topic 820 also apply.

50-11 Fair value disclosed in the notes shall be presented together with the related carrying amount in a form that clarifies both of the following:

Whether the fair value and carrying amount represent assets or liabilities
How the carrying amounts relate to what is reported in the statement of financial position.

50-12 If the fair value of financial instruments is disclosed in more than a single note, one of the notes shall include a summary table. The summary table shall contain the fair value and related carrying amounts and cross-references to the location(s) of the remaining disclosures required by this Section.

50-15 In disclosing the fair value of a financial instrument, an entity shall not net that fair value with the fair value of other financial instruments — even if those financial instruments are of the same class or are otherwise considered to be related (for example, by a risk management strategy) — except to the extent that the offsetting of carrying amounts in the statement of financial position is permitted under either of the following:

The general principle in paragraph 210-20-45-1
The exceptions for master netting arrangements in paragraph 815-10-45-5 and for amounts related to certain repurchase and reverse repurchase agreements in paragraphs 210-20-45-11 through 45-17.

Under ASC 825-10, public business entities must disclose information about the fair value of financial assets and financial liabilities (such as debt, lines of credit, revolving-debt arrangements, and term loan commitments) except for financial instruments that are specifically exempt under ASC 825-10-50-8 (e.g., trade payables due in less than one year and obligations related to prepaid stored-value products). This disclosure requirement applies irrespective of whether a financial instrument is recognized in the financial statements and how it is measured (e.g., amortized cost). The required disclosures include:

The fair value as of the reporting date (see Section 14.2.2).
The level of the fair value hierarchy (Level 1, 2, or 3) within which each fair value measurement is categorized in its entirety (see Chapter 8 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option)).

An entity may provide these disclosures either in the body of the financial statements or in the notes. If the information is provided in the notes, fair values must be presented “together with the related carrying amount” and it must be clear (1) “[h]ow the carrying amounts relate to what is reported” in the balance sheet and (2) whether the amounts represent assets or liabilities. If the information is included in more than one note, an entity must provide a summary table that contains the fair values and carrying amounts and cross-references to the locations of the remaining disclosures under ASC 825-10-50.

An entity cannot net the fair value of financial instruments unless the conditions in ASC 210-20 or ASC 815-10 for balance sheet offsetting are met (see Section 14.3.1.1). Further, the fair values disclosed should be consistent with the unit of account. For example, as discussed in ASC 825-10-25-13, “[f]or the issuer of a liability issued with an inseparable third-party credit enhancement . . . the unit of accounting for the liability . . . disclosed at fair value does not include the third-party credit enhancement.” Under ASC 470-20-50-1D, fair value information and the related level in the fair value hierarchy must be presented separately for each convertible debt instrument (see Section 14.4.9).

For financial instruments that are not measured at fair value in the financial statements after initial recognition, an entity is not required to provide the disclosures specified in ASC 820-10-50 (see Section 14.4.11), such as information about valuation techniques and inputs used, changes in the valuation approach or valuation technique, and significant unobservable inputs.

Entities other than public business entities are not required to provide disclosures about the fair value of financial assets and financial liabilities that are not measured at fair value in the statement of financial position.

14.4.11 Fair Value Option Liabilities

14.4.11.1 General

ASC 825-10

50-27 The disclosure requirements in paragraphs 825-10-50-28 through 50-30 do not eliminate disclosure requirements included in other Subtopics, including other disclosure requirements relating to fair value measurement. Entities are encouraged but are not required to present the disclosures required by this Subtopic in combination with related fair value information required to be disclosed by other Subtopics (for example, the General Subsection of this Section and Topic 820).

If a debtor has elected the fair value option in ASC 815-15 (see Section 8.5.6) or ASC 825-10 (see Section 4.4) for a financial liability, it must disclose comprehensive information about the related fair value measurements under ASC 820-10-50 and ASC 825-10-50. As discussed in ASC 825-10-50-9 and ASC 825-10-50-27, the disclosure requirements of other U.S. GAAP are not superseded by the incremental disclosure requirements in ASC 825-10-50 for items measured at fair value under the fair value option.

For a discussion of the disclosures required by ASC 820-10-50 and ASC 825-10-50, see Chapter 11 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option). This section outlines the incremental disclosure requirements in ASC 825-10 that apply to financial liabilities for which the fair value option has been elected.

14.4.11.2 Objective

ASC 825-10

50-24 The principal objectives of the disclosures required by paragraphs 825-10-50-28 through 50-32 are to facilitate both of the following comparisons:

Comparisons between entities that choose different measurement attributes for similar assets and liabilities
Comparisons between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities.

50-25 Those disclosure requirements are expected to result in the following:

Information to enable users of its financial statements to understand management’s reasons for electing or partially electing the fair value option
Information to enable users to understand how changes in fair values affect earnings for the period
The same information about certain items (such as equity investments and nonperforming loans) that would have been disclosed if the fair value option had not been elected
Information to enable users to understand the differences between fair values and contractual cash flows for certain items.

To meet those objectives, the disclosures described in paragraphs 825-10-50-28 through 50-32 are required for items measured at fair value under the option in this Subtopic and the option in paragraph 815-15-25-4. Those disclosures are not required for securities classified as trading securities under Topic 320, life settlement contracts measured at fair value pursuant to Subtopic 325-30, or servicing rights measured at fair value pursuant to Subtopic 860-50. Those Subtopics include disclosure requirements not affected by this Subtopic.

50-26 Entities shall provide the disclosures required by paragraphs 825-10-50-28 through 50-32 in both interim and annual financial statements.

ASC 825-10-50-24 through 50-26 identify the objectives of the disclosure requirements for items measured at fair value in accordance with the fair value option in ASC 825-10 or ASC 815-15 (e.g., comparability with similar items not measured at fair value by the same entity or other entities).

14.4.11.3 Balance Sheet Disclosures

ASC 825-10

50-28 As of each date for which a statement of financial position is presented, entities shall disclose all of the following:

Management’s reasons for electing a fair value option for each eligible item or group of similar eligible items
If the fair value option is elected for some but not all eligible items within a group of similar eligible items, both of the following:
1. A description of those similar items and the reasons for partial election
2. Information to enable users to understand how the group of similar items relates to individual line items on the statement of financial position.
For each line item in the statement of financial position that includes an item or items for which the fair value option has been elected, both of the following:
1. Information to enable users to understand how each line item in the statement of financial position relates to major classes of assets and liabilities presented in accordance with the fair value disclosure requirements of Topic 820. (Paragraph 825-10-50-11 also requires an entity to relate carrying amounts that are disclosed in accordance with that paragraph to what is reported in the statement of financial position.)
2. The aggregate carrying amount of items included in each line item in the statement of financial position that are not eligible for the fair value option, if any.
The difference between the aggregate fair value and the aggregate unpaid principal balance of each of the following: . . .

2. Long-term debt instruments that have contractual principal amounts and for which the fair value option has been elected. . . .

For each interim or annual period with a statement of financial position, the disclosures above are required for items accounted for at fair value by using the fair value option, including information about:

Management’s reasons for electing the fair value option.
How balance sheet line items with items for which the fair value option has been elected are related to major classes of assets and liabilities for which fair value disclosures are provided under ASC 820.
The aggregate amount of ineligible items included in line items with items for which the fair value option has been elected and those not eligible for the fair value option.
The difference between the aggregate fair value and the aggregate unpaid principal balance of long-term debt instruments for which an entity has elected the fair value option.

See Section 14.4.11.6 for examples illustrating these disclosures.

14.4.11.4 Income Statement Disclosures

ASC 825-10

50-30 For each period for which an income statement is presented, entities shall disclose all of the following about items for which the fair value option has been elected:

a. For each line item in the statement of financial position, the amounts of gains and losses from fair value changes included in earnings during the period and in which line in the income statement those gains and losses are reported. This Subtopic does not preclude an entity from meeting this requirement by disclosing amounts of gains and losses that include amounts of gains and losses for other items measured at fair value, such as items required to be measured at fair value.

b. A description of how interest and dividends are measured and where they are reported in the income statement. This Subtopic does not address the methods used for recognizing and measuring the amount of dividend income, interest income, and interest expense for items for which the fair value option has been elected. . . .

d. For liabilities, all of the following about the effects of the instrument-specific credit risk and changes in it:

1. The amount of change, during the period and cumulatively, of the fair value of the liability that is attributable to changes in the instrument-specific credit risk . . . .

3. How the gains and losses attributable to changes in instrument-specific credit risk were determined.

4. If a liability is settled during the period, the amount, if any, recognized in other comprehensive income that was recognized in net income at settlement.

For each interim or annual period with an income statement, the disclosures above are required for items accounted for at fair value by using the fair value option See Section 14.4.11.6 for examples illustrating these disclosures. ASC 825-10 does not prescribe how an entity should report gains and losses within the income statement.

A debtor must disclose information about the effects of instrument-specific credit risk and changes in it related to financial liabilities for which it has elected the fair value option.

14.4.11.5 Other Required Disclosures

ASC 825-10

50-31 In annual periods only, an entity shall disclose the methods and significant assumptions used to estimate the fair value of items for which the fair value option has been elected. For required disclosures about the method(s) and significant assumptions used to estimate the fair value of financial instruments, see paragraph 820-10-50-2(bbb) except that an entity is not required to provide the quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by that paragraph.

50-32 If an entity elects the fair value option at the time one of the events in paragraph 825-10-25-4(d) through (e) occurs, the entity shall disclose both of the following in financial statements for the period of the election:

Qualitative information about the nature of the event
Quantitative information by line item in the statement of financial position indicating which line items in the income statement include the effect on earnings of initially electing the fair value option for an item.

In annual periods, an entity that has elected the fair value option must disclose the methods and significant assumptions used to estimate fair value, including the information required to be disclosed under ASC 820-10-50-2(bbb). See Chapter 11 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option) for more information about these disclosures.

ASC 825-10-50-32 contains additional disclosure requirements related to fair value option elections that occur after a qualifying event under ASC 825-10-25-4(d) and (e). Those events are discussed in Sections 12.3.2.1 and 12.3.2.2 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

14.4.11.6 Illustrations

ASC 825-10

Example 1: Fair Value Measurements and Changes in Fair Values Included in Current-Period Earnings

55-6 The following Cases illustrate selected disclosure requirements for items reported at fair value under this Subtopic:

The Fair Value Option Subsection of 825–10–50 disclosures with voluntary integration of the General Subsection of 825–10–50 disclosures (Case A)
The Fair Value Option Subsection of 825–10–50 disclosures without voluntary integration of the General Subsection of 825–10–50 disclosures (Case B).

55-7 Cases A and B represent suggested forms for presenting disclosure information. While the suggested forms of presentation illustrate selected required disclosures, the suggested forms of presentation are not mandated by this Subtopic. Aggregation of related fair value disclosures is encouraged but not required.

55-8 The statement of financial position for Entity XYZ as of December 31, 20X1, is provided to assist in understanding the illustrative fair value disclosures in Cases A and B.

Case A: Disclosures With Voluntary Integration

55-9 The objective is to provide information about all of the following:

Assets and liabilities measured at fair value on a recurring basis (as required by Subtopic 820-10)
Changes in fair values of assets and liabilities for which the fair value option has been elected in a manner that relates to the statement of financial position (as required by this Subtopic)
Fair value estimates and corresponding carrying amounts for major categories of assets and liabilities that include items measured at fair value on a recurring basis (in accordance with the General Subsection of 825–10–50).

55-10 The following table represents the fair value tabular disclosure required by paragraph 820-10-50-2(b), supplemented to do both of the following:

Provide information about where in the income statement changes in fair values of assets and liabilities reported at fair value are included in earnings
Voluntarily integrate selected disclosures required annually by the General Subsection of 825-10-50.

Disclosures required by paragraphs 825-10-50-28(c) and 825-10-50-30(a) are illustrated in the narrative disclosure that follows the table.

55-11 An entity might provide either of the following additional disclosures required by paragraph 825-10-50-28(a) through (b) after the following table:

Management’s reasons for electing a fair value option for each eligible item or group of similar eligible items
If the fair value option is elected for some but not all eligible items within a group of similar eligible items, both of the following:
1. A description of those similar items and the reasons for partial election
2. Information to enable users to understand how the group of similar items relates to individual line items on the statement of financial position.

Case B: Disclosures Without Voluntary Integration

55-12 The following table illustrates an alternative presentation that does not integrate disclosures required annually by this Subtopic or the additional gain and loss amounts voluntarily displayed in the table in Case A. The following table represents the fair value hierarchy table set forth in Topic 820, supplemented to provide information about where in the income statement changes in fair values of assets and liabilities for which the fair value option has been elected are included in earnings. Disclosures required by paragraphs 825-10-50-28(c) and 825-10-50-30(a) are illustrated in the narrative disclosure that follows the table.

55-13 An entity might provide either of the following additional disclosures required by paragraph 825-10-50-28(a) through (b) after the table:

Management’s reasons for electing a fair value option for each eligible item or group of similar eligible items
If the fair value option is elected for some but not all eligible items within a group of similar eligible items, both of the following:
1. A description of those similar items and the reasons for partial election
2. Information to enable users to understand how the group of similar items relates to individual line items on the statement of financial position.

14.4.12 Guarantors and Collateralizations of Securities

Debt or preferred stock that is registered under the Securities Act of 1933 (the “Securities Act”) may be guaranteed by one or more affiliates of the issuer. Guarantees of registered securities are considered securities themselves under the Securities Act. As a result, both the guaranteed securities and the guarantees of those securities must be registered with the SEC unless they are exempt from registration. Further, a registrant may pledge the capital stock of one or more affiliates as collateral for debt or preferred stock registered under the Securities Act. In the event of a default, the debt holder may enforce the collateral provisions and, as a result, become a holder of the affiliate’s equity.

Regulation S-X requires registrants to disclose certain financial information about (1) guarantors and issuers of guaranteed securities and (2) affiliates whose securities collateralize debt or preferred stock. The requirements are based on the premise that investors in guaranteed debt or collateralized securities rely on the consolidated financial statements of the registrant as their primary source of financial information. Although registration of guaranteed securities under the Securities Act can result in requirements for both the issuer of the guaranteed security and the guarantor of the security to file periodic reports (i.e., Form 10-K and Form 10-Q) in accordance with the Securities Exchange Act of 1934, the SEC has typically provided relief from this requirement for subsidiary issuers and guarantors.

Regulation S-X, Rule 3-10, allows registrants to provide alternative nonfinancial disclosures and alternative financial disclosures (collectively, the “alternative disclosures”) in lieu of separate financial statements when certain criteria have been met. While Rule 3-10 outlines the eligibility conditions that must be met for a registrant to qualify for the alternative disclosures, the specific disclosure requirements are set forth in Regulation S-X, Rule 13-01. Disclosure requirements for smaller reporting companies are prescribed in Note 3 of Regulation S-X, Rule 8-01.

Regulation S-X, Rule 13-02, requires the registrant to provide “summarized financial information” and other narrative disclosures, to the extent material, of each affiliate whose securities collateralize the securities that are registered or being registered.

If a registered security contains both a guarantee by one or more subsidiaries and a pledge of affiliates’ equity, the registrant must consider the disclosure requirements in both Rule 13-01 and Rule 13-02 because (1) the guarantee and pledge constitute separate credit enhancements and (2) the disclosure requirements for each may be different. As a result, the alternative disclosures necessary for compliance with Rules 13-01 and 13-02 may differ, even if the affiliates whose equity is pledged as collateral and the subsidiaries that guarantee the security are the same entities.

A detailed discussion of these requirements is beyond the scope of this Roadmap. For further discussion, see Deloitte’s Roadmap SEC Reporting Considerations for Guarantees and Collateralizations.

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.