Chapter 14 — Presentation, Disclosure, and Other Considerations
Chapter 14 — Presentation, Disclosure, and Other Considerations
14.1 Background
This chapter briefly discusses accounting, presentation, and disclosure matters that
are not addressed elsewhere in the Roadmap.
14.2 Accounting
14.2.1 Hedge Accounting
14.2.1.1 General
This section discusses how the accounting for debt might be affected by the
application of hedge accounting.
14.2.1.2 Debt Designated as Hedged Item in Fair Value Hedge
When the qualifying criteria for hedge accounting are met,
ASC 815-20-25-12 permits an entity to designate debt (such as fixed-rate
debt) as a hedged item in a fair value hedge. Under ASC 815-20-25-12(f), the
debtor is permitted to designate the hedged risk as the risk of changes in
(1) the debt’s fair value in its entirety or (2) the portion of the debt’s
fair value attributable to changes in (a) a designated benchmark interest
rate (interest rate risk), (b) foreign currency exchange rates (foreign
exchange risk), or (c) changes in credit risk (such as the credit spread
over the benchmark interest rate). Under ASC 815-20-25-12(b), a debtor is
permitted to designate a portfolio of similar liabilities, a percentage of
an entire liability, or the contractual cash flows of one or more liability
as the hedged item (e.g., a partial-term interest rate risk hedge of the
first 5 years of 10-year debt by using an assumed term for the debt that
matches the hedged payments; see ASC 815-25-35-13B). Further, a debtor is
permitted to designate a benchmark rate component of the contractual cash
flows determined at hedge inception as the hedged item in an interest rate
risk hedge of debt (ASC 815-25-35-13). However, a debtor cannot designate a
fair value hedge related to a risk of changes in the debt’s fair value that
is recognized in earnings, such as interest rate risk related to debt for
which the fair value option in ASC 815-15 or ASC 825-10 has been elected or
foreign exchange risk related to foreign-denominated debt that is remeasured
at spot rates under ASC 830-20 (ASC 815-20-25-43(c)(3)).
When fair value hedge accounting is applied, the change in the debt’s fair
value attributable to the hedged risk is recognized as an adjustment to the
debt’s carrying amount, with an offsetting entry to earnings (ASC
815-25-35-1(b)). Except for excluded components, which are amortized to
earnings, gains and losses on the hedging instrument are recognized
immediately in earnings (ASC 815-25-35-1(a)). All amounts recognized in
earnings are presented in the same line item as the earnings effect of the
hedged item (e.g., interest expense). An adjustment to the debt’s carrying
amount is amortized to interest expense and must begin no later than the
debt ceases to be adjusted for changes in its fair value attributable to the
hedged risk (ASC 815-25-35-9). When a debtor uses a pay-variable,
receive-fixed interest rate swap to hedge debt and the conditions for the
shortcut method are met (see ASC 815-20-25-104 and 25-105), the change in
fair value of the hedged debt attributable to the risk being hedged does not
need to be directly measured. Instead, the change in the fair value of the
derivative hedging instrument adjusts the carrying amount of the hedged
debt, and interest expense is recognized on the basis of the variable rate
of the swap, adjusted for any difference between the fixed rate on the swap
and that on the hedged debt (ASC 815-25-55-43).
Fair value hedge accounting must be discontinued prospectively if the hedging
relationship no longer meets the criteria for fair value hedge accounting
(e.g., the hedge is no longer expected to be highly effective), the debtor
dedesignates the hedge, or the derivative expires or is sold, terminated
(except for certain novations), or exercised (ASC 815-25-40-1).
14.2.1.3 Debt Designated as Hedged Item in Cash Flow Hedge
When the qualifying criteria for hedge accounting are met,
an entity is permitted to designate probable variable cash flows associated
with existing debt (such as variable-rate debt or foreign-denominated
fixed-rate debt) or a probable forecasted purchase or issuance of debt (or
probable interest payments on such debt) as a hedged item in a cash flow
hedge. ASC 815-20-25-15(j) permits the debtor to designate the hedged risk
as the risk of changes in (1) overall changes in the hedged cash flows, (2)
forecasted variable-rate interest payments associated with existing debt and
attributable to changes in a contractually specified interest rate (interest
rate risk), (3) forecasted cash flows associated with the forecasted
issuance of debt (or the forecasted interest payments) and attributable to
changes in a benchmark interest rate or an expected contractually specified
interest rate, (4) the functional-currency-equivalent cash flows
attributable to changes in the related foreign currency exchange rate
(foreign exchange risk), or (5) the risk of changes in cash flows
attributable to credit risk (e.g., changes in the credit spread over the
contractually specified interest rate or the benchmark interest rate).
However, a debtor cannot designate a cash flow hedge related to existing
debt or the forecasted issuance of debt if the debt is remeasured, with
changes in fair value attributable to the hedged risk recognized in
earnings, such as foreign exchange risk related to foreign-denominated debt
that is remeasured at spot rates under ASC 830-20.
When cash flow hedge accounting is applied, the accounting
for the hedged item is not altered. Instead, gains and losses on the hedging
instrument related to the hedged risk are recognized in OCI and reclassified
to earnings in the same period or periods during which the hedged forecasted
transaction affects earnings. That reclassification and the amount
recognized in earnings for any excluded components are presented in the same
income statement line item as the earnings effect of the hedged item (e.g.,
interest expense).
Cash flow hedge accounting must be discontinued
prospectively if the hedging relationship no longer meets the criteria for
cash flow hedge accounting (e.g., the hedge is no longer expected to be
highly effective), the debtor dedesignates the hedge, or the derivative
expires or is sold, terminated (except for certain novations), or exercised
(ASC 815-30-40-1). However, in accordance with ASC 815-30-40-4, the amount
in AOCI related to a discontinued hedge is not reclassified to earnings
unless both (1) “it is probable that the forecasted transaction will not
occur by the end of the originally specified time period (as documented at
the inception of the hedging relationship) or within an additional two-month
period of time thereafter” and (2) no rare, “extenuating circumstances that
are related to the nature of the forecasted transaction and are outside the
control or influence of the reporting entity . . . cause the forecasted
transaction to be probable of occurring on a date that is beyond the
additional two-month period of time.” Further, under ASC 815-30-40-5, “[a]
pattern of determining that hedged forecasted transactions are probable of
not occurring would call into question both an entity’s ability to
accurately predict forecasted transactions and the propriety of using hedge
accounting in the future for similar forecasted transactions.”
14.2.1.4 Debt Designated as Hedging Instrument in Foreign Currency Fair Value Hedge of a Firm Commitment
When the qualifying criteria for hedge accounting are met,
ASC 815-20-25-58 permits an entity to designate foreign-denominated debt as
a hedging instrument in a foreign currency fair value hedge of an
unrecognized firm commitment or a portion thereof (e.g., a firm commitment
to purchase or sell a nonfinancial item). ASC 815-20 does not address how to
account for such debt. Instead, an entity applies ASC 830-20, which requires
foreign-denominated debt to be remeasured at spot rates (see Section 14.2.3).
Certain foreign-denominated intra-entity loans for which an offsetting
third-party loan is in place can also be designated as a hedging instrument
in a foreign currency fair value hedge of an unrecognized firm commitment or
a portion thereof (see ASC 815-20-25-60).
14.2.1.5 Debt Designated as Hedging Instrument in Net Investment Hedge
When the qualifying criteria for hedge accounting are met,
ASC 815-20-25-66 permits an entity to designate foreign-denominated debt as
a hedging instrument in a foreign currency hedge of a net investment in a
foreign operation. However, such designation cannot be applied if the debt
is accounted for at fair value through earnings. When net investment hedge
accounting is applied, the foreign currency transaction gain or loss on the
debt (i.e., the remeasurement of the debt at spot rates) under ASC 835-30
(see Section
14.2.3) is recognized in OCI in a manner similar to a
translation adjustment associated with the hedged net investment. The
cumulative translation adjustment is recognized in earnings in accordance
with ASC 830-30-40 (see Section 5.4 of Deloitte’s Roadmap Foreign Currency Matters).
14.2.2 Fair Value Measurements
Sometimes, the accounting for debt involves fair value
measurements (e.g., the initial measurement of debt that is initially measured
by using present value techniques under ASC 835-30, debt accounted for at fair
value by using the fair value option in ASC 815-15 or ASC 825-10, the
measurement of bifurcated embedded derivatives under ASC 815-15, debt that is
designated as a hedged item in a fair value hedge under ASC 815-20 and ASC
815-25, and initial measurements in transactions that include multiple units of
accounts). In determining fair value, an entity should apply the guidance in ASC
820. In the absence of a specific exception, ASC 820 applies whenever fair value
measurements or disclosures are permitted or required under GAAP.
For a detailed discussion of the guidance in ASC 820, see
Deloitte’s Roadmap Fair
Value Measurements and Disclosures (Including the Fair Value
Option). That Roadmap addresses fair value measurement
considerations specific to notes payable (Section 2.3.1), hedged items in fair value
hedges (Section
2.3.11), liabilities and instruments classified in equity
(Section
10.2.7), fair value disclosures (Chapter 11), and the application of the
fair value option (Chapter
12).
14.2.3 Foreign Currency Matters
ASC 830-20
35-1 A change
in exchange rates between the functional currency and
the currency in which a transaction is denominated
increases or decreases the expected amount of functional
currency cash flows upon settlement of the transaction.
That increase or decrease in expected functional
currency cash flows is a foreign currency transaction
gain or loss that generally shall be included in
determining net income for the period in which the
exchange rate changes.
35-2 At each
balance sheet date, recorded balances that are
denominated in a currency other than the functional
currency of the recording entity shall be adjusted to
reflect the current exchange rate. At a subsequent
balance sheet date, the current rate is that rate at
which the related receivable or payable could be settled
at that date. Paragraphs 830-20-30-2 through 30-3
provide more information about exchange rates.
Under ASC 830-20, a debtor is required to remeasure the carrying
amount of debt that is denominated in a currency other than its functional
currency as of each reporting date by using the current exchange rate. Because
debt issuance costs are presented as a reduction of the debt’s carrying amount,
the remeasurement should be based on the carrying amount after deduction of any
remaining unamortized debt issuance costs. Accordingly, the debt’s carrying
amount will change each reporting date (until the debt is extinguished) as a
result of changes in exchange rates. Generally, the changes in the net carrying
amount are recognized in earnings as transaction gains or losses. For additional
discussion of the application of ASC 830, see Deloitte’s Roadmap Foreign Currency
Matters.
14.2.4 Capitalization of Interest
ASC 835-20
15-5 Interest
shall be capitalized for the following types of assets
(qualifying assets):
- Assets that are constructed or otherwise produced for an entity’s own use, including assets constructed or produced for the entity by others for which deposits or progress payments have been made.
- Assets intended for sale or lease that are constructed or otherwise produced as discrete projects (for example, ships or real estate developments).
- Investments (equity, loans, and advances) accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations provided that the investee’s activities include the use of funds to acquire qualifying assets for its operations. The investor’s investment in the investee, not the individual assets or projects of the investee, is the qualifying asset for purposes of interest capitalization.
30-3 The
amount capitalized in an accounting period shall be
determined by applying the capitalization rate to the
average amount of accumulated expenditures for the asset
during the period. The capitalization rates used in an
accounting period shall be based on the rates applicable
to borrowings outstanding during the period. If an
entity’s financing plans associate a specific new
borrowing with a qualifying asset, the entity may use
the rate on that borrowing as the capitalization rate to
be applied to that portion of the average accumulated
expenditures for the asset that does not exceed the
amount of that borrowing. If average accumulated
expenditures for the asset exceed the amounts of
specific new borrowings associated with the asset, the
capitalization rate to be applied to such excess shall
be a weighted average of the rates applicable to other
borrowings of the entity.
ASC 835-20 requires debtors to capitalize certain interest costs as part of the
cost of “qualifying assets.” Generally, capitalization of interest is required
during the period that an entity is getting a qualifying asset ready for its
intended use. Qualifying assets include assets that are (1) constructed or
produced either for the entity’s own use or, as discrete projects, for lease or
sale (e.g., ships or real estate) or (2) accounted for under the equity method
“while the investee has activities in progress necessary to commence its planned
principal operations.” Capitalization is not permitted for assets that are in
use, substantially complete and ready for their intended use, or not in use
unless they are undergoing activities necessary to get them ready for use.
Further, capitalization is not permitted for inventories that are produced in
large quantities on a repetitive basis.
An entity determines the amount to be capitalized by applying a
capitalization rate to the average amount of accumulated expenditure it has
incurred on a qualifying asset during a period. To the extent that the average
accumulated expenditures do not exceed the amount of specific new borrowings
related to a qualifying asset, the entity is permitted to use the rate on those
borrowings as the capitalization rate. Otherwise the entity uses a weighted
average rate applicable to borrowings outstanding during the period. In
determining an appropriate capitalization rate, the entity should also consider
the amortization of any fair value hedge adjustments on its outstanding
borrowings (see ASC 815-25-35-14 and ASC 815-25-55-52).
14.2.5 Reference Rate Reform
14.2.5.1 Background
ASC 848 permits entities to elect optional expedients and
exceptions related to the application of certain accounting requirements for
contracts, hedging relationships, and other transactions that refer to a
reference rate that is expected to be discontinued as a result of the
transition away from the use of interbank offered rates (e.g., LIBOR) to
alternative reference rates.1 An entity can elect to apply the optional expedients and exceptions to
certain contract modifications and hedging relationships from the beginning
of the interim period that includes March 20, 2020, through December 31,
2024. While a comprehensive discussion of ASC 848 is beyond the scope of
this Roadmap, this section briefly discusses the guidance in ASC 848-20 on
contract modifications (see Section 14.2.5.2) and summarizes the
relief available to debtors under ASC 470-50 and ASC 815-15 for such
modifications (see Sections 14.2.5.3 and 14.2.5.4, respectively).
14.2.5.2 Scope
ASC 848-20
General
15-1 This
Subtopic provides guidance on optional expedients
for accounting for contract modifications when one
or more terms are modified because of reference rate
reform.
Modifications of Terms
15-2 The guidance in this
Subtopic, if elected, shall apply to contracts that
meet the scope of paragraph 848-10-15-3 if either or
both of the following occur:
- The terms that are modified directly replace, or have the potential to replace, a reference rate within the scope of paragraph 848-10-15-3 with another interest rate index. If other terms are contemporaneously modified in a manner that changes, or has the potential to change, the amount or timing of contractual cash flows, the guidance in this Subtopic shall apply only if those modifications are related to the replacement of a reference rate. For example, the addition of contractual fallback terms or the amendment of existing contractual fallback terms related to the replacement of a reference rate that are contingent on one or more events occurring has the potential to change the amount or timing of contractual cash flows and the entity potentially would be eligible to apply the guidance in this Subtopic.
- The interest rate used for margining, discounting, or contract price alignment is modified as a result of reference rate reform.
15-3 Other than a
modification of the interest rate used for
margining, discounting, or contract price alignment
in accordance with paragraph 848-20-15-2(b), for
contracts that meet the scope of paragraph
848-10-15-3, the guidance in this Subtopic shall not
apply if a contract modification is made to a term
that changes, or has the potential to change, the
amount or timing of contractual cash flows and is
unrelated to the replacement of a reference rate.
That is, this Subtopic shall not apply if contract
modifications are made contemporaneously to terms
that are unrelated to the replacement of a reference
rate.
15-4 Contemporaneous
modifications of contract terms that do not change,
or do not have the potential to change, the amount
or timing of contractual cash flows shall not
preclude application of the guidance in this
Subtopic, regardless of whether those
contemporaneous contract modifications are related
or unrelated to the replacement of a reference rate
or the modification of the interest rate used for
margining, discounting, or contract price alignment
as a result of reference rate reform.
Identifying
Changes to Terms Related and Unrelated to the
Replacement of the Reference Rate
15-5 Changes
to terms that are related to the replacement of the
reference rate are those that are made to effect the
transition for reference rate reform and are not the
result of a business decision that is separate from
or in addition to changes to the terms of a contract
to effect that transition. . . .
ASC 848-20 permits an entity to elect certain expedients (such as those
described in Sections 14.2.5.3 and
14.2.5.4) related to the modification of contract
terms that will directly replace, or have the potential to replace, an
affected rate with another interest rate index, as well as certain
contemporaneous modifications of other contract terms related to the
replacement of an affected rate. When contemporaneous modifications are
made, an entity’s eligibility to use the optional expedients depends on
whether the contemporaneous modifications to the other terms (1) could
affect the amount or timing of contractual cash flows and (2) are related to
reference rate reform. If a contemporaneous contract modification could
affect the amount or timing of contractual cash flows, the optional
expedients are not available if that modification is unrelated to the
replacement of a reference rate. Changes in contract terms are considered
unrelated to the replacement of a reference rate if they are “the result of
a business decision that is separate from or in addition to changes to the
terms of a contract to effect that transition.” If it is not possible for a
contemporaneous contract modification to affect the amount or timing of
contractual cash flows, an entity is not precluded from applying the
optional expedients even if that modification is unrelated to the
replacement of a reference rate.
The table below provides
examples of possible types of modifications and indicates whether they
generally would be considered related to the replacement of a reference
rate.
Related
|
Unrelated
|
---|---|
Changes to:
|
Changes to:
|
The addition of:
|
The addition of:
|
The addition of or changes to:
|
The addition or removal of:
|
A concession granted to a debtor experiencing
financial difficulty
|
Further, ASC 848-20 permits an entity to disregard circumstances in which
modified fallback terms include or have the potential to include a term
unrelated to reference rate reform if, when the fallback terms are added or
amended, the entity “determines that activation of the term unrelated to
reference rate reform is not probable of occurring if the fallback terms are
triggered.”
14.2.5.3 Evaluation of Debt Modifications Under ASC 470-50
ASC 848-20
35-8 If an entity elects the
optional expedient in this paragraph, the entity
shall account for a modification of a contract
within the scope of Topic 470 that meets the scope
of paragraphs 848-20-15-2 through 15-3 in accordance
with paragraphs 470-50-40-14, 470-50-40-17(b), and
470-50-40-18(b) as if the modification was not
substantial. That is, the original contract and the
new contract shall be accounted for as if they were
not substantially different from one another, and
the modification shall not be accounted for in the
same manner as a debt extinguishment in accordance
with paragraph 470-50-40-13.
35-9 If the
optional expedient in paragraph 848-20-35-8 is
elected, it shall be applied to all contracts under
Topic 470 as described in paragraph 848-20-35-1.
35-10 If the
optional expedient in paragraph 848-20-35-8 is
elected, an entity that applies the 10 percent cash
flow test described in paragraph 470-50-40-10 for
any subsequent contract modification within a year
shall consider only terms and provisions that were
in effect immediately following the election of the
optional expedient for the particular contract.
If a debt modification is within the scope of the elective relief (see
Section 14.2.5.2), the debtor can choose to account
for the modification as if it was not substantial under ASC 470-50 even if
the modification would have been considered an extinguishment under ASC
470-50 (see Section 10.3). When elected, the optional
expedient must be applied consistently for all eligible contracts within the
scope of ASC 470. In performing the 10 percent cash flow test (see
Section 10.3.3) in ASC 470-50-40-10 for any
subsequent contract modifications made within a year, the debtor should
consider only terms and provisions that were in effect immediately following
the election of the optional expedient, which is an exception to the
guidance in ASC 470-10-25-12(f) (see Section
10.3.3.4).
14.2.5.4 Reassessment of Embedded Derivatives Under ASC 815-15
ASC 848-20
35-14 If the
optional expedient in this paragraph is elected,
modification of a contract that meets the scope of
paragraphs 848-20-15-2 through 15-3 (including the
addition of an interest rate floor or cap that is
out of the money in paragraph 848-20-15-5(e)) shall
not require an entity to reassess its original
conclusion about whether that contract contains an
embedded derivative that is clearly and closely
related to the economic characteristics and risks of
the host contract for the purposes of paragraph
815-15-25-1(a).
35-15 If the
optional expedient in paragraph 848-20-35-14 is
elected, it shall be applied to all contracts under
Subtopic 815-15 as described in paragraph
848-20-35-1.
If a debt modification is within the scope of ASC 848 (see Section
14.2.5.2), the debtor can elect not to reassess its
conclusion about whether the debt contains an embedded derivative that is
clearly and closely related to the economic characteristics and risks of the
host contract under ASC 815-15 (see Section 8.5.4).
When elected, the optional expedient must be applied consistently for all
eligible contracts within the scope of ASC 815-15.
Footnotes
1
ASC 848 applies to derivatives that are affected by
reference rate reform as a result of the discounting transition even
if such derivatives do not refer to a rate that is expected to be
discontinued.
14.3 Presentation
14.3.1 Balance Sheet
14.3.1.1 Balance Sheet Offsetting
ASC 210-20
45-1 A right
of setoff exists when all of the following
conditions are met:
- Each of two parties owes the other determinable amounts.
- The reporting party has the right to set off the amount owed with the amount owed by the other party.
- The reporting party intends to set off.
- The right of setoff is enforceable at law.
45-2 A debtor
having a valid right of setoff may offset the
related asset and liability and report the net
amount.
When certain conditions are met, ASC 210-20 permits but does not require an
entity to offset the carrying amounts of assets and liabilities and present
only a net amount on the balance sheet (i.e., only a net asset or a net
liability is presented related to the amounts that have been offset).
Offsetting does not affect the application of the accounting requirements
that apply to the recognition, measurement, and derecognition of assets and
liabilities (e.g., it does not affect when gain or loss recognition is
appropriate or how it should be measured); it only affects the display of
assets and liabilities on the balance sheet.
Under ASC 210-20-45-1, four conditions must be met for an
entity to offset assets and liabilities:
- “Each of two parties owes the other determinable
amounts.”That is, (1) an entity cannot offset receivables and payables with different counterparties, (2) the amounts must be determinable (i.e., contingent or estimated amounts cannot be offset), and (3) an entity is not precluded from offsetting amounts that are denominated in different currencies or have different stated interest rates (see ASC 210-20-45-3).
- “The reporting party has the right to set off the
amount owed with the amount owed by the other party.”In the absence of a right to set off, an entity cannot present amounts net even if it expects that such amounts will be net settled. If the maturities of a payable and receivable with the same counterparty differ, only the party with the nearer maturity can offset the related amounts (see ASC 210-20-45-3). Balances without an explicit settlement date cannot be set off. For example, payables cannot be offset against cash on deposit at a financial institution (see ASC 210-20-55-18A).
- “The reporting party intends to set off.”An entity should document its intention to set off, and that intention should be consistent with its past practice of setting off in similar situations, if applicable (see ASC 210-20-45-5). If an entity’s right to set off is contingent on the entity’s or the counterparty’s default, the related amounts cannot be presented net. The right to set off must be exercisable in the normal course of business. If an entity does not expect to set off amounts, those amounts do not qualify for net presentation on the balance sheet.There are two exceptions to this condition. They apply to amounts recognized under certain (1) repurchase agreements and reverse repurchase agreements accounted for as collateral borrowings under ASC 860 (see ASC 210-20-45-11 through 45-17) and (2) derivatives and cash collateral balances subject to a master netting agreement (see ASC 815-10-45-5). However, these exceptions do not apply to debt that is within the scope of the guidance in this Roadmap (see Section 2.3.2).
- “The right of setoff is enforceable at law.”A legal analysis may be necessary in the determination of whether an enforceable right of setoff exists. In accordance with ASC 210-20-45-9, all available evidence must be considered and must provide “reasonable assurance that the right of setoff would be upheld in bankruptcy.” An entity cannot necessarily assume that it has a right to set off even if a contract states so, since state laws differ and the U.S. bankruptcy code limits the ability to assert a right of set off in certain circumstances (see ASC 210-20-45-8).An entity should apply a consistent policy for offsetting amounts that qualify for such treatment.
14.3.1.2 Legal-Form Debt Cannot Be Presented in Equity
SEC Staff Accounting Bulletins
SAB Topic 4.A,
Subordinated Debt [Reproduced in ASC
470-10-S99-2]
Facts: Company E proposes to
include in its registration statement a balance
sheet showing its subordinate debt as a portion of
stockholders’ equity.
Question: Is this
presentation appropriate?
Interpretive Response:
Subordinated debt may not be included in the
stockholders’ equity section of the balance sheet.
Any presentation describing such debt as a component
of stockholders’ equity must be eliminated.
Furthermore, any caption representing the
combination of stockholders’ equity and only
subordinated debts must be deleted.
An instrument that represents a legal-form debt obligation should be
presented as a liability even if it has certain economic characteristics
that are similar to those of an equity instrument. For example, debt that
has a stated maturity, a stated coupon right, and creditor rights (e.g., an
ability to seek recourse in a bankruptcy court) is presented as a liability
on the basis of its legal form even if it is mandatorily convertible into
the debtor’s equity shares. As noted in SAB Topic 4.A, a debtor is not
permitted to present debt as a component of equity even if it is
subordinated to other debt or presented in a balance sheet caption that
includes both subordinated debt and equity.
An instrument that represents a legal-form debt obligation in the
jurisdiction in which it is issued and carries creditor rights should be
presented as a liability even if the issuer only has a de minimis amount of
common equity capital and the instrument (1) is described as an “equity
certificate,” (2) has a long maturity (e.g., 40 years) or no stated
maturity, (3) is subordinated to all other creditors, (4) contains
conversion rights into common equity, and (5) provides dividend rights that
are similar to those of a holder of common equity (e.g., payable only if
declared). If it is not readily apparent whether a claim on the entity
legally represents debt or equity, the entity may need to seek an opinion
from legal counsel.
A debtor is precluded from presenting debt as equity even if
it is converted into the debtors’ equity shares or repaid from the proceeds
of the issuance of equity-classified shares shortly after the balance sheet
date. Such an event represents a nonrecognized subsequent event under ASC
855. Further, ASC 470-10-45-14(a) states, in part, that if “equity
securities have been issued for the purpose of refinancing [a] short-term
obligation on a long-term basis . . . , the short-term obligation, although
excluded from current liabilities, shall not be included in owners’ equity”
(see Section
13.7.3).
14.3.1.3 Structured Trade Payable Arrangements
14.3.1.3.1 Financial Statement Presentation
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.
(a) State
separately amounts payable to
(1) banks for borrowings;
(2) factors or other financial institutions
for borrowings;
(3) holders of commercial paper;
(4) trade creditors;
(5) related parties (see §
210.4-08(k));
(6) underwriters, promoters, and employees
(other than related parties); and
(7) others.
Amounts applicable to (1), (2) and (3) may be
stated separately in the balance sheet or in a
note thereto. . . .
When an entity purchases goods or services on credit
from a supplier (vendor), a trade payable arises for the invoice amount
owed to the supplier. Sometimes entities with trade payables enter into
arrangements with a bank or other intermediary under which the
intermediary offers to purchase receivables held by the entity’s
suppliers. Such arrangements are known by various names, such as
“structured payable arrangements,” “vendor payable programs,” “open
account structured vendor payable programs,” “reverse factoring,”
“supplier finance,” or “supplier-chain finance.”
Examples of structured payable arrangements include (1)
open account platforms that permit an entity’s suppliers to elect to
sell trade receivables to one or more participating intermediaries, (2)
an entity’s use of charge cards issued by a financial institution to
settle invoices, and (3) an entity’s issuance of negotiable instruments
(e.g., bills of exchange) to settle invoices.
Typically, open account platforms give participating
suppliers the option to settle trade receivables by obtaining a payment
from an intermediary either (1) before the invoice date at a discounted
amount or (2) on the invoice due date for its full amount. Although the
supplier may receive payment early, the purchasing entity is not
required to settle its trade payable with the intermediary until the
original invoice date.
Depending on its terms, a structured trade payable
arrangement offers the parties various potential benefits, such as the
following:
- Suppliers can monetize trade receivables and reduce the associated credit exposure — By selling their trade receivables to an intermediary, suppliers can receive payment before the invoice due date and reduce their credit exposure.
- Purchasers can obtain extended payment terms — Suppliers may be more willing to agree to extended payment terms with purchasers if they can obtain early payment from intermediaries. Further, intermediaries may offer purchasers extended payment terms.
- Intermediaries can benefit from early payment discounts, rebates, and transaction fees and charges — Intermediaries earn a spread on the basis of the relationship between their funding costs and the amount of early payment discounts, rebates, and other fees and charges received from suppliers.
- Operational benefits — Because of an intermediary’s involvement, the arrangement may enhance the processing, administration, and control of the associated payments for purchasers and suppliers.
- Extended early-payment discount period — If an intermediary pays a supplier within the period during which the supplier offers an early payment discount (e.g., a 2 percent discount for payment within 30 days or 2/10 net 30), for instance, the intermediary may offer the entity a discount on the amount due for an extended period (e.g., 1/10 net 60).
- Reduction in the amount due or other similar rebate — The intermediary may offer the entity a reduction of the amount due or a reimbursement of part of the amount paid on the basis of net amounts paid to suppliers. (A supplier may agree to pay the intermediary a fee or reduce the amount due because of benefits it receives from the arrangement, such as a lowered credit risk exposure on the amount due or earlier payment of such amount.)
If an entity has a trade payable arrangement involving
an intermediary, it should consider how to appropriately present and
disclose the amount payable. Regulation S-X, Rule 5-02(19)(a), requires
SEC registrants to present amounts payable to trade creditors separately
from borrowings on the face of the balance sheet. Accordingly, a
purchasing entity that participates in a trade payable program involving
an intermediary should consider whether the intermediary’s involvement
changes the appropriate presentation of the payable from a trade payable
to a borrowing from the intermediary (e.g., bank debt). Entities often
seek to achieve trade payable classification because trade payables tend
to be treated more favorably than short-term indebtedness in the
calculation of financial ratios (e.g., balance sheet leverage measures)
and in the determination of whether financial covenants are met.
Further, the determination of whether the payable should be presented as
an amount owed to trade creditors or an amount borrowed from the
intermediary may affect the appropriate cash flow statement
classification (see below for further discussion).
Generally, a supplier’s decision to factor a trade
receivable to a bank or other financial institution does not affect the
purchaser’s presentation of the associated trade payable if the
factoring terms are negotiated and agreed to independently by the
supplier and the institution without any involvement of the purchaser,
which may not even be aware of the factoring transaction. Similarly, an
entity’s decision to outsource its supplier processing payments to an
intermediary does not necessarily cause a reclassification of associated
trade payables if the terms of the payables remain unaffected and the
entity is not involved in, or does not benefit from, transactions
between the suppliers and the intermediary. In other words, if the
intermediary’s involvement does not change the nature, amount, and
timing of the entity’s payables and does not provide the entity with any
direct economic benefit, continued trade payable classification may be
appropriate. However, reclassification may be required if such changes
or benefits result from the intermediary’s involvement (e.g., because
fees or rebate payments were received from the intermediary).
In speeches at the 2003 and 2004 AICPA Conferences on
Current SEC and PCAOB Developments, then Professional Accounting Fellow
Robert Comerford discussed the SEC staff’s views about the presentation
of certain trade payable arrangements involving an intermediary as trade
payables or short-term borrowings. At the 2004 event, he stated the following:
As a general rule, the OCA Staff does not believe
that it is possible to determine the appropriate accounting for
structured transactions simply via reference to checklists and
templates. Rather, . . . an entity must perform a thorough analysis
of all the facts and circumstances specific to the individual
transaction in order to ensure that the entity’s accounting for the
transaction serves investors well. . . . [T]his necessitates meeting
not just the letter, but the spirit of the accounting
literature.
Mr. Comerford identified a number of points (summarized
below) that the SEC staff encourages preparers and auditors to consider
in determining whether amounts due in trade payable arrangements
involving an intermediary should be classified as trade payables or
borrowings. He also noted that a registrant may wish to preclear its
proposed classification with the OCA if there is a risk that its
position could be subject to challenge. Given the subjective nature of
the evaluation and the lack of prescriptive guidance, alternative views
may be acceptable in some circumstances.
SEC Staff Consideration
Point
|
Related SEC Staff
Observations
|
Deloitte Observations
|
---|---|---|
What are “the roles,
responsibilities and relationships of each party”
to the arrangement? What is “the totality of the
arrangement”?
|
By analogy to a supplier’s
factoring of accounts receivables, the definition
of factoring “does not make any mention of the
[purchaser] actively or passively participating in
the process.”
|
It can be helpful to consider
whether the intermediary’s role in the arrangement
is primarily that of (1) a factor of supplier
receivables, (2) a finance provider to the entity,
or (3) the entity’s paying agent. If the
intermediary’s involvement does not change the
nature, amount, and timing of the entity’s
payments and does not provide the entity with any
direct economic benefit, continued trade payable
classification may be appropriate. See below for
further discussion.
|
“Does the financial institution
make any sort of referral or rebate payments” to
the purchaser?
|
By analogy to a supplier’s
factoring of accounts receivables, the definition
of factoring “does not make any mention of [the
supplier’s] customer receiving . . . any referral
fees or rebates.”
|
If the entity receives no fees,
rebates, payments, or other direct economic
benefits from transactions between suppliers and
the intermediary, continued trade payable
classification may be appropriate. An entity’s
receipt of referral or rebate payments from the
intermediary (e.g., on the basis of fees, early
settlement discounts collected by the
intermediary, or a dollar-volume-based rebate)
suggests that continued classification of a
payable as an amount owed to trade creditors may
no longer be appropriate. In practice, classifying
payables as trade payables has been considered
unacceptable when the purchaser shares in early
settlement discounts collected by the intermediary
from the supplier (e.g., the intermediary provides
a rebate to the purchaser that is equivalent to
half of a 2 percent early settlement discount
received from the supplier).
|
“Has the financial institution
reduced the amount due . . . , such that the
amount due is less than the amount the [entity]
would have had to pay to the vendor on the
original payable due date?”
|
By analogy to a supplier’s
factoring of accounts receivables, the definition
of factoring does not “make any mention of the
[supplier’s] customer receiving any reductions in
the amount of its obligation.”
|
If the entity’s original invoice
terms remain the same, continued trade payable
classification may be appropriate. An
intermediary’s reduction of the amount due from
the entity may suggest that continued
classification of a payable as an amount owed to
trade creditors is no longer appropriate.
|
“Has the financial institution
extended beyond the payable’s original due date,
the date on which payment is due”?
|
By analogy to a supplier’s
factoring of accounts receivables, the definition
of factoring does not “make any mention of the
[supplier’s] customer receiving . . . any
extension of its trade payable maturity dates
beyond that which were customary prior to the
inception of the arrangement [e.g.,] 2/10 net
30.”
|
Payment terms and amounts that
remain consistent with those of the entity’s other
vendor payables and industry practice may suggest
that continued classification as a trade payable
may be appropriate. However, if the intermediary
is not merely facilitating the payment of the
entity’s invoice but extending the entity’s due
date to a date after the original invoice due date
and the date the intermediary pays suppliers, the
entity’s arrangement may, in substance, be a
borrowing from the intermediary.
|
The literal definition of the
term “trade creditor.”
|
“The OCA Staff believes that a
trade creditor is a supplier that has provided an
entity with goods and services in advance of
payment.”
|
Generally, third-party factoring
arrangements involving an entity’s payables do not
preclude trade payable classification if the
entity has no involvement and is not a party to
contracts entered into between the supplier and
the factor. If the creditor at origination is a
supplier, therefore, the supplier’s subsequent
sale of its receivable to a factor does not
necessarily change the nature of that trade
payable so that reclassification is required.
|
As noted above, one of the consideration points is
related to the roles, responsibilities, and relationships among the
parties and the totality of the arrangement, such as whether the
intermediary’s primary role in the arrangement is that of a factor of
supplier receivables, a finance provider to the purchaser, or a paying
agent of the purchaser. In some arrangements, the intermediary may serve
both as a paying agent and a factor or finance provider (e.g., if the
intermediary gives suppliers the option to either receive payment on the
original invoice due date or to transfer trade receivables to the
intermediary before the due date at a discounted amount).
Primary Role of Intermediary
|
Description
|
Implication
|
---|---|---|
Factor of trade receivables
|
The intermediary purchases trade
receivables from the entity’s suppliers, with no
active involvement of the entity. The arrangement
does not significantly affect the nature, amount,
and timing of the entity’s payments to settle
trade payables.
|
Trade payable classification may
be appropriate.
|
Finance provider to purchasing
entity
|
The entity’s purpose is to
obtain financing from the intermediary. The
arrangement affects the nature, amount, or timing
of the entity’s payments to settle trade payables,
and there may be a direct economic benefit to the
entity.
|
Trade payable classification is
likely to be inappropriate.
|
Paying agent of purchasing
entity
|
The intermediary acts as the
purchasing entity’s paying agent in settling trade
payables with suppliers on behalf of the
entity.
|
Although trade payable
classification may be appropriate initially, the
purchasing entity should assess whether
extinguishment accounting is required under ASC
405-20 when the intermediary pays the
supplier.
|
In practice, additional
factors that an entity may consider in its evaluation of whether amounts
due in trade payable arrangements involving an intermediary should be
classified as trade payables or borrowings include:
Consideration Point
|
Observations
|
---|---|
How significant is the entity’s
involvement in the contractual relationship
between suppliers and the intermediary?
|
The purchaser’s involvement in
the initial set-up of the process (e.g., by
requiring vendors to sign up with the
intermediary) and submitting invoices for payment
to the financial institution (e.g., in an
electronic payable processing system) would not
necessarily preclude a conclusion that the payable
is still an amount due to trade creditors. More
direct involvement by the purchasing entity may
suggest that trade payable classification is
inappropriate, particularly if the entity has a
direct economic interest in the terms agreed to
between the suppliers and the intermediary (e.g.,
through the sharing of fees or discounts received
by the intermediary from suppliers).
|
Have any of the terms of the
payable changed as a result of the intermediary’s
involvement in the arrangement?
|
If the terms of the payable have
not changed as a result of the intermediary’s
involvement in the arrangement, continued trade
payable classification may be appropriate. If the
intermediary has rights that go beyond that of a
holder of the original trade receivable (e.g., a
priority claim in the entity’s liquidation),
reclassification may be required.
|
Does the supplier maintain
recourse against the entity?
|
The supplier’s maintenance of
recourse against the entity for nonpayment, and
the intermediary’s recourse against the supplier
if the entity does not pay, may help support a
conclusion that the payable should be presented as
a trade payable.
|
Does the entity still have the
right to negotiate returns of damaged goods and
refunds and other adjustments to the invoice terms
with the supplier?
|
If the entity does not retain
the right to negotiate returns of damaged goods
and refunds and other adjustments to the invoice
terms with the supplier (e.g., in case of
commercial disputes), reclassification may be
required.
|
Is supplier participation
voluntary?
|
Although a requirement for an
entity’s suppliers to participate in a trade
payable arrangement with an intermediary is not
determinative, it may support a conclusion that
trade payable classification is inappropriate.
|
Is the arrangement offered to a
broad range of suppliers?
|
If the arrangement is offered
only to one or a small, limited group of
suppliers, a conclusion that trade payable
classification is inappropriate may be
supported.
|
Are the payment terms consistent
with those of trade payables in the entity’s
industry?
|
If the payment terms are
atypical of those of trade payables in the
entity’s industry (e.g., due dates) because of the
intermediary’s involvement in the arrangement,
trade payable classification may be
inappropriate.
|
Is the entity informed of
transactions between suppliers and the
intermediary?
|
The entity’s lack of direct
knowledge of transactions between suppliers and
the intermediary (e.g., early settlements at a
discount) may help support a conclusion that the
payable should be presented as a trade payable.
However, the entity’s right to obtain such
information does not necessarily preclude trade
payable classification.
|
Does interest accrue before the
due date?
|
The fact that the payable
accrues interest before the due date may suggest
that trade payable classification is
inappropriate.
|
What is the legal form of the
entity’s obligation?
|
An instrument whose legal form
under the U.S. Uniform Commercial Code is more
like a negotiable instrument (such as a promissory
note) than an account payable may suggest that
trade payable classification is inappropriate.
(The intermediary may prefer the legal form to be
that of a negotiable instrument to facilitate
transfers of the receivable.)
|
Does the intermediary require
the entity to post collateral, maintain credit
facilities, or arrange third-party guarantees?
|
The fact that the entity is
required to post collateral, maintain credit
facilities, or arrange third-party guarantees for
the benefit of the intermediary suggests that
trade payable classification may be
inappropriate.
|
Is the priority of the
intermediary’s claim on the entity more senior
than that of the original trade payable?
|
If the priority of the
intermediary’s claim on the entity is more senior
than that of the original trade payable, trade
payable classification may be inappropriate.
|
In his 2003 speech, Mr. Comerford provided two examples of arrangements involving
trade payable transactions with an intermediary that an entity should
not, according to the SEC staff, present as amounts payable to trade
creditors but rather as borrowings from financial institutions:
- “[A]n intermediary, typically a financial institution or one of its affiliates, pays trade payables on behalf of the purchaser in order to take advantage of discounts for early payment that the purchaser would not otherwise avail itself of. The purchaser then pays the lender either the full amount of the trade payable at a future date beyond the payable’s normal terms, or an amount less than the full amount of the trade payable but on the trade payable’s normal due date. Thus, the arrangement between the lender and the purchaser often results in the purchaser securing financing at lower cost of funds than is inherent in the vendor’s invoice. In this transaction, the vendor is often not aware of the arrangement between the purchaser and the lender.”
- “[T]he vendor [is] a willing participant in a tri-party arrangement between the manufacturer, the vendor and the intermediary. Specifically, the intermediary accepts an IOU from the purchaser and presents a separate IOU to the vendor. The lender provides the purchaser with incentives similar to those provided in the first transaction and provides the vendor with the ability to present its IOU to the lender for accelerated payment at an appropriately discounted amount.”
In both examples, the purchasing entity benefits by
either (1) obtaining a repayment date from the financial institution
beyond the due date of the original payable or (2) sharing in a portion
of the trade discount received by the financial institution via the
accelerated payment to the vendor. Further, the payments made by the
intermediary to the vendor “were made within the time period necessary
to secure a trade discount.” Mr. Comerford noted that the OCA objects to
trade payable classification in these circumstances. Instead, the staff
believes as follows:
[T]he substance of both of
these transactions equates to the purchaser obtaining financing from
a lender in order to pay amounts due to its vendors. . . . [T]he
manufacturer’s original liability to the vendor is extinguished on
the date the lender remits cash or a lender IOU to the vendor.
Pursuant to the provisions of Article 5, the purchaser should
derecognize its trade account payable and record a new liability
classified on its balance sheet as a borrowing from the lender.
Consistent with this classification, the purchaser should then
accrete the difference between the initial carrying amount of the
borrowing (i.e. the discounted amount of the vendor invoice) and the
repayment amount (i.e. the amount owed to the lender) through
interest expense using the effective yield method.
In his 2004 speech, Mr. Comerford warned registrants and
auditors not to mistake the SEC staff’s 2003 discussion of the two trade
payable arrangements for a set of rules to use for determining when
short-term borrowings should be classified as trade payables. Rather, as
noted above, an entity must consider all the facts and circumstances and
comply with both the letter and the spirit of the accounting
requirements.
We are not aware that the SEC staff has addressed an
entity’s use of p-cards (i.e., purchase cards), other types of charge
cards, or credit cards to pay invoices. If these arrangements are only
used as the original mechanism to incur an expenditure with a vendor, it
may be acceptable to consider such amounts owed as trade payables in
certain situations. For example, if one of these types of bank-issued
cards is used only as a matter of convenience to incur an expenditure
(i.e., pay the vendor immediately), the amounts owed are paid during the
customary period in which trade payables are due, and interest costs are
not incurred, classification of such amounts owed as trade payables is
generally acceptable.
P-cards and other charge cards are sometimes used by
entities to extend payment terms. When a p-card or other charge card is
used to pay an invoice owed to a vendor, the entity has extinguished its
liability to the vendor and incurred an obligation with a bank.
Therefore, continued classification as a trade payable is not
appropriate. For example, an entity might extend the payment terms on a
trade payable with an invoice due date of April 1, 20X0, by using a
charge card that has a monthly settlement date of April 30, 20X0, for
which full payment of all charges incurred in April 20X0 are due on May
31, 20X0. In this scenario, the entity has extended the payment terms by
60 days. Continued classification as a trade payable after the vendor
has been paid is inappropriate; therefore, such classification could
only be accepted on the basis of a materiality argument in this type of
arrangement.
It is difficult to distinguish between (1) an entity’s
use of a credit card to make payments to vendors and (2) its use of a
traditional revolving line of credit to make such payments (i.e., in
both arrangements, interest costs accrue). Therefore, any time a credit
card is used to pay trade payables, the entity should reclassify such
payables as liabilities owed to a bank. In no situation in which an
entity (1) uses any type of bank-issued card to pay invoices and (2)
incurs interest on such card can the entity continue to classify as
trade payables amounts paid to vendors as a result of having incurred
those charges.
Example 14-1
Structured
Vendor Payable Program
A structured vendor payable
program (SVPP) that is established as follows
might not change the characteristics of trade
payables (i.e., it might not require
reclassification to short-term debt):
- The entity enters into an agreement for buyer payment services in which the intermediary is acting as the entity’s paying agent for the entity’s suppliers.
- The intermediary offers participating suppliers the opportunity to voluntarily factor their receivables from the entity to the intermediary. That is, a supplier is able to factor its receivable to the intermediary on a discounted basis before the invoice due date. Specifically, the intermediary offers vendors the following two payment options: (1) payment on the due date in 60 days or (2) advance payment in 30 days at a 2.5 percent discount.
- The SVPP does not relieve the entity of its obligation to its suppliers under invoices eligible for factoring under the SVPP. The supplier maintains recourse against the entity for nonpayment and for any commercial dispute related to the invoice.
- The SVPP does not change the payment terms, timing, or amount with respect to the entity’s obligation to its supplier. The entity’s obligation to the supplier is neither affected nor reduced by any separate contract between the intermediary and the supplier.
- The payment terms are consistent with those typically offered in the entity’s industry.
- The entity will not participate in any negotiations between suppliers and the intermediary.
- Although the entity may request such information from the intermediary, it will not be automatically notified of any advance payment or other transactions between the supplier and intermediary.
- The entity is not obligated to pay any fees directly to the intermediary and will not receive any amounts or benefits from the intermediary in the form of a rebate or other incentives. The entity is obligated to pay the full invoice amount even if the intermediary paid the supplier at a discount.
- The legal form of the trade payable has not changed.
If a trade payable arrangement involving an intermediary
must be classified as a borrowing, an entity should consider the
associated cash flow statement implications (see also Section 7.2 of
Deloitte’s Roadmap Statement of Cash Flows). At the December
2005 AICPA Conference on Current SEC and PCAOB Developments, SEC
Associate Chief Accountant Joel Levine stated, in part:
The situation
addressed by the staff dealt with a transaction similar to the
purchase of non-[X] products financed through [X]. For example, say
a dealer purchases [Y and Z] financed under a floor-plan arrangement
with [X]. [X] pays the supplier directly and then is repaid later by
the dealer. In this case, the financing arrangement is not with the
supplier, as it was when the dealer purchased [X] products;
therefore, it does not represent a trade loan. It represents a
third-party financing arrangement. Not a big deal, except that the
inventory purchase, an operating activity, has taken place without
the dealer physically delivering the cash. Based on the view that
the financing entity effectively has acted as the dealer’s agent, we
concluded that upon purchase of the inventory, the dealer should
report the increase in the third-party loan in substance as a
financing cash inflow, with a corresponding operating cash outflow
for the increase in inventory. Upon repayment, the cash outflow
would be reported as a financing activity. Here, the cash flows
statement would depict the substance of the transactions — with the
end result being similar to the previous example where the net
effect on operating cash flows is the amount of gross profit
generated.
In accordance with this speech, when the debt owed to a
bank for a good or service purchased from a supplier is recognized, the
amount must be treated as an operating cash outflow and a financing cash
inflow even though the entity actually did not have any cash outflow to
the supplier. This is because an entity must apply, in substance, a
“constructive cash payment/receipt” approach to the transaction when
preparing the statement of cash flows. The subsequent cash paid to
satisfy the amount owed to the bank is classified as a financing cash
outflow.
14.3.1.3.2 Disclosure
ASC 405-50
05-1
This Subtopic addresses the disclosures applicable
for an entity that uses a supplier finance program
in connection with the purchase of goods and
services (the buyer in a supplier finance
program). A supplier finance program also may be
referred to as a reverse factoring, payables
finance, or structured payables arrangement.
10-1
The objective of this Subtopic is to establish
disclosures that enhance the transparency of a
supplier finance program used by an entity in
connection with the purchase of goods and services
(the buyer in a supplier finance program).
10-2
This Subtopic does not address either of the
following:
-
A buyer’s recognition, measurement, or financial statement presentation of an obligation in connection with a supplier finance program
-
The accounting and disclosure for other parties involved in a supplier finance program.
15-1
The guidance in this Subtopic applies to all
entities that use supplier finance programs in
connection with the purchase of goods and services
(buyers in a supplier finance program).
15-2
The guidance in this Subtopic applies to
obligations in connection with supplier finance
programs. A supplier finance program is an
arrangement that has all the following
characteristics:
-
An entity enters into an agreement with a finance provider or an intermediary.
-
The entity confirms supplier invoices as valid to the finance provider or intermediary under the agreement described in (a).
-
The entity’s supplier has the option to request early payment from a party other than the entity for invoices that the entity has confirmed as valid.
15-3
Although not determinative, an indicator that an
entity may have a supplier finance program is the
commitment to pay a party other than the supplier
for a confirmed invoice without offset, deduction,
or any other defenses to payment.
15-4 In
determining whether an entity has established a
supplier finance program and, therefore, is
subject to the disclosures required by this
Subtopic, all available evidence shall be
considered, including arrangements between the
entity and its finance provider or intermediary
and between the entity and its suppliers whose
invoices the entity has confirmed as valid to the
finance provider or intermediary.
50-1
The objective of the requirements in this Subtopic
is for an entity to disclose sufficient
information to enable users of financial
statements to understand the nature, activity
during the period, changes from period to period,
and potential magnitude of the entity’s supplier
finance programs. To achieve that objective, an
entity shall disclose qualitative and quantitative
information about its supplier finance
programs.
50-2 An
entity shall consider the level of detail
necessary to satisfy the disclosure objective. If
an entity uses more than one supplier finance
program, the entity may aggregate disclosures, but
not to the extent that useful information is
obscured by the aggregation of programs that have
substantially different characteristics.
50-3 In
each annual reporting period, an entity shall
disclose all the following information about its
supplier finance programs:
-
The key terms of the program, including, but not limited to:
-
A description of the payment terms, including payment timing and the basis for its determination
-
Assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.
See paragraphs 405-50-55-1 through 55-3 for an illustrative example. -
-
The amount of obligations outstanding at the end of the reporting period that the entity has confirmed as valid to the finance provider or intermediary under the program (that is, the amount of obligations confirmed under the program that remains unpaid by the entity) and the following information about those obligations:
-
Where those obligations are presented in the balance sheet. If those obligations are presented in more than one balance sheet line item, then the entity shall disclose the amount outstanding at the end of the reporting period in each line item.
-
A rollforward of those obligations showing, at a minimum, all the following:
-
The amount of those obligations outstanding at the beginning of the reporting period
-
The amount of those obligations added to the program during the reporting period
-
The amount of those obligations settled during the reporting period
-
The amount of those obligations outstanding at the end of the reporting period.
-
-
50-4 In
each interim reporting period, an entity shall
disclose the amount of obligations outstanding
that the entity has confirmed as valid to the
finance provider or intermediary under the
supplier finance program at the end of the
reporting period.
ASC 405-50 requires the buyer in a supplier finance
program to disclose qualitative and quantitative information about the
program. Under ASC 405-50-15-2, such a program is defined as an
“arrangement that has all the following characteristics:”
-
“An entity enters into an agreement with a finance provider or an intermediary.”
-
“The entity confirms supplier invoices as valid to the finance provider or intermediary under the agreement.”
-
“The entity’s supplier has the option to request early payment from a party other than the entity for invoices that the entity has confirmed as valid.”
The disclosure requirements in ASC 405-50 apply regardless of whether the
entity classifies its liabilities under a supplier finance program as a
trade payable or on another balance sheet line (e.g., debt).
ASC 405-50 does not apply to any of the following:
- The intermediary or supplier in a supplier finance program.
- Traditional credit card programs for which an intermediary is directed to pay the supplier on behalf of an entity.
- Payment processing arrangements that do not give a supplier the option to request early payment.
- Arrangements that extend, or give an entity the option to extend, the payment terms associated with the payment due date in the related invoice.
- Credit enhancements, such as letters of credit or financial guarantees, provided by an intermediary to a supplier on an entity’s behalf.
ASC 405-50-50-3 and 50-4 specify the disclosures for
annual and interim periods, and ASC 405-50-55-4 and 55-5 illustrate how
to disclose the rollforward information required under ASC
405-50-50-3(b)(2). (Note that entities do not have to provide these
disclosures until fiscal years beginning after December 15, 2023,
although early adoption is permitted.)
ASC 405-50
Example
2: Disclosure of a Rollforward of Obligations
Confirmed as Valid Under a Supplier Finance
Program
55-4
This Example provides an illustration of the
guidance in paragraph 405-50-50-3(b)(2) based on
the assumptions that Entity A provides one
comparative balance sheet and that its supplier
finance program is denominated in Entity A’s
reporting currency.
55-5
The following illustrates the disclosures in a
tabular format.
The
rollforwards of Entity A’s outstanding obligations
confirmed as valid under its supplier finance
program for years ended December 31, 20X2, and
20X1, are as follows (in thousands):
Connecting the Dots
ASC 405-50-50-3(b) requires entities to provide
certain disclosures related to “[t]he amount of obligations
outstanding at the end of the reporting period that the entity
has confirmed as valid to the finance provider or intermediary
under the program.” Questions have arisen related to whether
these disclosures are limited to the amount that the finance
provider or intermediary has funded (i.e., the amount the
supplier has been paid by the finance provider or intermediary
before the related invoice due date). However, this requirement
applies to the amount that remains unpaid by the entity
irrespective of whether the supplier has been paid. There is no
requirement in ASC 405-50 to disclose the amount funded by the
finance provider or intermediary.
14.3.1.4 Separate Presentation of Debt Measured at Fair Value
ASC 825-10
45-1A An
entity shall separately present financial assets and
financial liabilities by measurement category and
form of financial asset (that is, securities or
loans and receivables) in the statement of financial
position or the accompanying notes to the financial
statements.
45-1B
Entities shall report assets and liabilities that
are measured at fair value pursuant to the fair
value option in this Subtopic in a manner that
separates those reported fair values from the
carrying amounts of similar assets and liabilities
measured using another measurement attribute.
45-2 To
accomplish that, an entity shall either:
- Present the aggregate of fair value and non-fair-value amounts in the same line item in the statement of financial position and parenthetically disclose the amount measured at fair value included in the aggregate amount
- Present two separate line items to display the fair value and non-fair-value carrying amounts.
ASC 815-15
45-1 In each
statement of financial position presented, an entity
shall report hybrid financial instruments measured
at fair value under the election and under the
practicability exception in paragraph 815-15-30-1 in
a manner that separates those reported fair values
from the carrying amounts of assets and liabilities
subsequently measured using another measurement
attribute on the face of the statement of financial
position. To accomplish that separate reporting, an
entity may do either of the following:
- Display separate line items for the fair value and non-fair-value carrying amounts
- Present the aggregate of the fair value and non-fair-value amounts and parenthetically disclose the amount of fair value included in the aggregate amount.
An entity must disaggregate financial liabilities by measurement category
either on the face of the balance sheet or in the notes to the financial
statements. A debtor that has measured debt instruments at fair value under
ASC 825-10 (see Section 4.4) or ASC 815-15 (including
those measured at fair value because the entity is unable to reliably
identify and measure an embedded derivative that would otherwise need to be
bifurcated; see Sections 8.5.5 and
8.5.6) must present those debt instruments on the
balance sheet in a manner that separates them from the carrying amounts of
similar debt instruments that are measured by using an attribute other than
fair value (e.g., debt that is accounted for by using the interest method in
ASC 835-30; see Section 6.2). ASC 825 and ASC 815-15
identify two ways to accomplish such presentation: (1) separate line items
or (2) parenthetical disclosure of fair value amounts.
In the absence of regulations that require separate presentation of accrued
interest, the fair value amount presented on the balance sheet for an
interest-bearing financial asset or financial liability accounted for at
fair value through earnings should include any interest earned or incurred
but not paid (accrued interest). It would, however, be acceptable for an
entity to parenthetically disclose the amount of the fair value measurement
that represents accrued interest in the financial statement line item for
which the interest-bearing financial asset or financial liability accounted
for under the fair value option is presented.
If there are regulations that require presentation of accrued interest
separately from the related interest-bearing financial asset or financial
liability for which the fair value option has been elected, an entity must
do one of the following to comply with the disclosure requirements in ASC 825:
- Present the aggregate amount of accrued interest, which represents part of the fair value of the asset or liability, in a separate line item in the statement of financial position.
- Parenthetically disclose the amount of the fair value measurement that represents accrued interest in the financial statement line item for which the interest-bearing financial asset or financial liability is presented.
14.3.1.5 SEC Requirements
The FASB has not prescribed which specific line items an entity must present
related to debt on its balance sheet, although debtors typically present
short-term borrowings separately from long-term debt (see Chapter
13). Entities that file financial statements with the SEC
must comply with the balance sheet requirements in Regulation S-X, including
those that apply to the following types of entities:
- Commercial and industrial companies (see the next section).
- Bank holding companies (see Section 14.3.1.5.2).
- Insurance companies (see Section 14.3.1.5.3).
- Registered investment companies (see Section 14.3.1.5.4).
14.3.1.5.1 Commercial and Industrial Companies
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)). . . .
Liabilities and Stockholders’ Equity
Current Liabilities, When Appropriate
19. Accounts and notes payable.
(a) State separately amounts
payable to
(1) banks for borrowings;
(2) factors or other financial institutions
for borrowings;
(3) holders of commercial paper;
(4) trade creditors;
(5) related parties (see §
210.4-08(k));
(6) underwriters, promoters, and employees
(other than related parties); and
(7) others.
Amounts applicable to (1), (2) and (3) may be
stated separately in the balance sheet or in a
note thereto.
(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.
20. Other current liabilities. State separately,
in the balance sheet or in a note thereto, any
item in excess of 5 percent of total current
liabilities. Such items may include, but are not
limited to, accrued payrolls, accrued interest,
taxes, indicating the current portion of deferred
income taxes, and the current portion of long-term
debt. Remaining items may be shown in one
amount.
21. Total current liabilities, when
appropriate.
Long-Term Debt.
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).
(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.
23. Indebtedness to related parties — noncurrent.
Include under this caption indebtedness to related
parties as required under § 210.4-08(k). . . .
Regulation S-X requires SEC registrants subject to Rule 5-02 (i.e.,
commercial and industrial companies) to present current liabilities
separately from long-term debt on the face of the balance sheet. When
appropriate, a total of current liabilities must also be shown.
Within current liabilities, accounts and notes payable are presented
separately from other current liabilities on the face of the balance
sheet. Within accounts and notes payable, the amounts of borrowings from
(1) banks, (2) factors and other financial institutions, and (3)
commercial paper holders are shown separately either on the face of the
balance sheet or in the notes. Further, amounts due to (1) trade
creditors (e.g., payables for goods or services); (2) related parties;
(3) underwriters, promoters, and employees (other than related parties);
and (4) others are stated separately on the face of the balance sheet.
Other current liabilities include, for example, accrued interest and the
current portion of long-term debt. Any item within the other current
liabilities category in excess of 5 percent of total current liabilities
must be displayed separately on the face of the balance sheet or in the
notes.
Within noncurrent liabilities, bonds, mortgages, and other long-term
debt, are shown separately from related-party debt. For each issue or
type of obligation of bonds, mortgages, and other long-term debt, the
entity states separately either on the face of the balance sheet or in a
note (1) the general character of each debt type; (2) the interest rate;
(3) the maturity date or, for serial-maturity debt (e.g., amortizing
debt), the serial maturity period; (4) 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); (5)
priority (e.g., senior or subordinated debt); and (6) if applicable,
conversion terms.
14.3.1.5.2 Bank Holding Companies
SEC Rules, Regulations, and Interpretations
Regulation
S-X, Rule 9-03, Balance Sheets [Reproduced in ASC
942-210-S99-1]
The purpose of this rule is to indicate the
various items which, if applicable, should appear
on the face of the balance sheets or in the notes
thereto. . . .
13. Short-term borrowing. Disclosure separately
on the balance sheet or in a note, amounts payable
for
(1) Federal funds purchased
and securities sold under agreements to
repurchase;
(2) commercial paper,
and
(3) other short-term borrowings.
(a) Disclose any unused lines of credit for
short-term financing: (§ 210.5-02.19(b)). . .
.
16. Long-term debt. Disclose in
a note the information required by § 210.5-02.22.
. . .
Regulation S-X requires SEC registrants subject to Rule 9-03 (i.e., bank
holding companies) to present separate balance sheet captions for
short-term borrowings and long-term debt. However, such entities are not
required to present a classified balance sheet with separate subtotals
for short-term and long-term liabilities.
Within the short-term borrowings category, entities separately disclose
federal funds purchased and securities sold under repurchase agreements,
commercial paper, and other short-term borrowing either on the face of
the balance sheet or in the notes. For each issue or type of obligation
of bonds, mortgages, and other long-term debt, the entity states in a
note (1) the general character of each debt type; (2) the interest rate;
(3) the maturity date or, for serial-maturity debt (e.g., amortizing
debt), the serial maturity period; (4) an indication of any contingency
associated with the payment of principal or interest (e.g., additional
interest contingent on an event of default or delayed filings); (5)
priority (e.g., senior or subordinated debt); and (6) if applicable,
conversion terms.
14.3.1.5.3 Insurance Companies
SEC Rules, Regulations, and Interpretations
Regulation S-X, Rule 7-03, Balance Sheets
[Reproduced in ASC 944-210-S99-1]
(a) The purpose of this rule is to indicate the
various items which, if applicable, and except as
otherwise permitted by the Commission, should
appear on the face of the balance sheets and in
the notes thereto filed for persons to whom this
article pertains. (See § 210.4-01(a).). . .
16. Notes payable, bonds, mortgages and similar
obligations, including capitalized leases.
(a) State separately in the
balance sheet the amounts of (1) short-term debt
and (2) long-term debt including capitalized
leases.
(b) The disclosure required
by § 210.5-02.19(b) shall be given if the
aggregate of short-term borrowings from banks,
factors and other financial institutions and
commercial paper issued exceeds five percent of
total liabilities.
(c) The disclosure
requirements of § 210.5-02.22 shall be followed
for long-term debt.
17. Indebtedness to related parties. (See §
210.4-0.8(k).) . . .
Regulation S-X requires SEC registrants subject to Rule
7-03 (i.e., insurance companies) to divide their presentation of amounts
for notes payable, bonds, mortgages, and similar obligations between
short-term debt and long-term debt (including capitalized leases) on the
face of the balance sheet. However, such entities are not required to
present a classified balance sheet with separate subtotals for
short-term and long-term liabilities.
For each issue or type of obligation of long-term debt, the entity
discloses separately either on the face of the balance sheet or in a
note (1) the general character of each debt type; (2) the interest rate;
(3) the maturity date or, for serial-maturity debt (e.g., amortizing
debt), the serial maturity period; (4) an indication of any contingency
associated with the payment of principal or interest (e.g., additional
interest contingent on an event of default or delayed filings); (5)
priority (e.g., senior or subordinated debt); and (6) if applicable,
conversion terms.
14.3.1.5.4 Registered Investment Companies
SEC Rules, Regulations, and Interpretations
Regulation S-X, Rule 6-04, Balance Sheets
[Reproduced in ASC 946-210-S99-1]
This section is applicable to balance sheets
filed by registered investment companies and
business development companies except for persons
who substitute a statement of net assets in
accordance with the requirements specified in §
210.6-05, and issuers of face-amount certificates
which are subject to the special provisions of §
210.6-06. Balance sheets filed under this rule
shall comply with the following provisions: . .
.
13. Notes payable, bonds and similar debt.
(a) State separately amounts
payable to:
(1) Banks or other financial institutions for
borrowings;
(2) controlled companies;
(3) other affiliates; and
(4) others, showing for each category amounts
payable within one year and amounts payable after
one year.
(b) Provide in a note the
information required under § 210.5-02.19(b)
regarding unused lines of credit for short-term
financing and § 210.5-02.22(b) regarding unused
commitments for long-term financing arrangements.
. . .
Regulation S-X requires SEC registrants subject to Rule 6-04 (i.e.,
registered investment companies) to present the amount of notes payable,
bonds, and similar debt on the face of the balance sheet with a
breakdown of amounts payable to (1) banks or other financial
institutions for borrowings, (2) controlled companies, (3) other
affiliates, and (4) others. For each category, amounts payable within
one year and amounts payable after one year are shown. However, such
entities are not required to present a classified balance sheet with
separate subtotals for short-term and long-term liabilities.
14.3.2 Cash Flow Statement
ASC 230-10
45-14 All of
the following are cash inflows from financing
activities: . . .
b. Proceeds from issuing bonds, mortgages,
notes, and from other short- or long-term
borrowing . . . .
45-15 All of
the following are cash outflows for financing
activities: . . .
b. Repayments of amounts borrowed, including
the portion of the repayments made to settle
zero-coupon debt instruments that is attributable
to the principal or the portion of the repayments
made to settle other debt instruments with coupon
interest rates that are insignificant in relation
to the effective interest rate of the borrowing
that is attributable to the principal.
c. Other principal payments to creditors who
have extended long-term credit. See paragraph
230-10-45-13(c), which indicates that most
principal payments on seller-financed debt
directly related to a purchase of property, plant,
and equipment or other productive assets are
financing cash outflows. . . .
e. Payments for debt issue costs. . . .
g. Payments for debt prepayment or debt
extinguishment costs, including third-party costs,
premiums paid, and other fees paid to lenders that
are directly related to the debt prepayment or
debt extinguishment, excluding accrued
interest.
45-17 All of
the following are cash outflows for operating activities:
a. Cash payments to acquire materials for
manufacture or goods for resale, including
principal payments on accounts and both short- and
long-term notes payable to suppliers for those
materials or goods. The term goods includes
certain loans and other debt and equity
instruments of other entities that are acquired
specifically for resale, as discussed in paragraph
230-10-45-21. . . .
d. Cash payments to lenders and other creditors
for interest, including the portion of the
payments made to settle zero-coupon debt
instruments that is attributable to accreted
interest related to the debt discount or the
portion of the payments made to settle other debt
instruments with coupon interest rates that are
insignificant in relation to the effective
interest rate of the borrowing that is
attributable to accreted interest related to the
debt discount. For all other debt instruments, an
issuer shall not bifurcate cash payments to
lenders and other creditors at settlement for
amounts attributable to accreted interest related
to the debt discount, nor classify such amounts as
cash outflows for operating activities. . .
.
Under ASC 230, proceeds from borrowings are classified as cash inflows from
financing activities, whereas repayment of amounts borrowed, payments for debt
issue costs, and payments for debt prepayment or debt extinguishment costs are
classified as cash outflow for financing activities. However, principal payments
on notes payable to suppliers for materials or goods are classified as cash
outflows for operating activities.
Although ASC 230 does not address debt modifications accounted
for under ASC 470-50, when debt is restructured and is accounted for as a
modification rather than as an extinguishment, an entity should apply the
principles in ASC 230 and classify fees paid to the creditor on the modification
date as a financing cash outflow (see Section 6.2.1 of Deloitte’s Roadmap
Statement of Cash
Flows). Further, any fees paid to a third party other
than the creditor in connection with a debt modification should generally be
classified as operating cash outflows because, in accordance with ASC
470-50-40-18(b), the payment must be expensed.
An entity that issues zero-coupon bonds to an investor records
the proceeds from the bonds’ issuance as a financing cash inflow. Unless the
debtor elects to account for the bonds at fair value under the fair value
option, the bonds are accreted to their redemption value in accordance with the
interest method (see Section
6.2); that is, the carrying amount of the bonds increases from
issuance until maturity (or earlier if prepayment is allowed) for the accrued
interest to arrive at the bonds’ redemption value. On the maturity date (or
earlier if prepayment is allowed), the entity repays (1) the original proceeds
(the principal amount of the bonds) and (2) the accrued interest from the date
of issuance. Before the bonds’ maturity (or the date of prepayment, if earlier),
the interest expense is presented in the statement of cash flows as a
reconciling item between net income and cash flows from operating activities,
since no interim cash payments are made for the periodic accrual of interest. At
redemption, the cash paid to settle the interest component is reflected as a
cash outflow from operating activities in the statement of cash flows in
accordance with ASC 230-10-45-17(d) as the accrued interest is recognized in
earnings. The cash paid to settle the principal component (excluding the
interest component) is reflected as a cash outflow from financing activities in
the statement of cash flows in accordance with ASC 230-10- 45-15(b). For an
illustration of this accounting, see Example 6-9 in Deloitte’s Roadmap
Statement of Cash
Flows.
In addition to zero-coupon bonds, the guidance in ASC 230-10-45-17(d) also
applies to other debt instruments “with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing that
is attributable to the principal.” The objective of including these other debt
instruments (rather than all debt instruments) is to improve comparability
related to entities’ presentation of economically similar transactions. ASC 230
does not define the term “insignificant” or otherwise provide guidance on what
would constitute insignificant coupon rates. Consequently, entities that issue
other debt instruments with coupon rates that are insignificant in relation to
the effective interest rate attributable to the principal will most likely need
to exercise greater judgment in evaluating the portion of the rates that is
insignificant. We generally believe that an entity should determine whether an
interest rate is insignificant by looking to the market. For example, a 1
percent coupon rate may not be insignificant if the market rate is 2 percent.
However, an entity may conclude that a 1 percent coupon rate is insignificant
compared with a market rate of 10 percent.
As discussed in Section 6.4.3 of Deloitte’s Roadmap
Statement of Cash
Flows, the guidance in ASC 230-10-45-17(d) applies to all
debt instruments that are economically similar to zero-coupon instruments,
including debt instruments that contain periodic interest coupons that are
payable in kind.
For additional discussion about the application of ASC 230, see
Deloitte’s Roadmap Statement of Cash Flows.
14.3.3 Earnings per Share
While a detailed discussion of the guidance in ASC 260-10 is
beyond the scope of this Roadmap, this section briefly discusses how debt could
affect an issuer’s EPS calculations. For a comprehensive discussion of the
guidance in ASC 260-10, see Deloitte’s Roadmap Earnings per Share.
14.3.3.1 Participating Securities
Sometimes, debt securities (e.g., certain convertible debt)
have a nondiscretionary and objectively determinable participation right in
the debtor’s undistributed earnings (e.g., a right to participate on an
if-converted basis in any dividends or other distributions to holders of
common stock). For such securities, the debtor should consider whether EPS
must be calculated by using the two-class method under ASC 260. The
two-class method applies to both basic and diluted EPS. Potential common
shares (e.g., convertible debt) are subject to the two-class method of
calculating diluted EPS if the effect is more dilutive than the application
of another dilutive method of calculating diluted EPS (i.e., the treasury
stock, if-converted, or contingently issuable share method). For a detailed
discussion of these requirements, see Chapter 5 of Deloitte’s Roadmap
Earnings per
Share.
14.3.3.2 Convertible Debt
When debt is convertible into the debtor’s shares of common
stock, the if-converted method should be applied in the computation of
diluted EPS. For convertible debt that is a participating security, the
two-class method should be applied in the computation of diluted EPS if it
is more dilutive than the if-converted method (see the previous
section).
If a convertible debt instrument does not represent a
participating security, the if-converted method is used to reflect the
impact of the embedded conversion option on diluted EPS. Under the
if-converted method, an entity may need to adjust both the numerator and
denominator. Since an entity using the if-converted method assumes that a
convertible debt instrument was converted into common shares at the
beginning of the reporting period (or the date of issuance, if later), the
numerator is adjusted to reverse any recognized interest expense (including
any amortization of discounts), net of tax, unless the principal amount must
be settled in cash. The common shares issuable upon conversion are added to
the denominator on the basis of the most favorable conversion terms
available to the holder. Except for convertible debt for which the principal
amount must be settled in cash upon conversion and certain contingently
convertible debt instruments, the if-converted method, if dilutive, must be
applied even if the embedded conversion option is out-of-the-money. For a
detailed discussion of these requirements, see Sections 4.4 and 6.2 of Deloitte’s
Roadmap Earnings per
Share.
If a convertible debt instrument does not represent a
participating security and the debtor can settle all or a portion of it in
cash or common stock upon conversion, the debtor must consider the guidance
in ASC 260 on contracts that may be settled in stock or cash. Under that
guidance, an entity presumes that a contract that may be settled in either
cash or stock will be settled in common stock for diluted EPS purposes. That
presumption cannot be overcome (e.g., on the basis of past experience or a
stated policy). If the principal amount must be settled in cash and the
conversion spread in shares, only the net number of shares equivalent to the
conversion spread is reflected in the computation of diluted EPS. If the
entire obligation can be settled in shares, the full number of shares
underlying the conversion feature is reflected in the application of the
if-converted method.
Special considerations are necessary if:
- An induced conversion occurs (see Section 6.6.1 of Deloitte’s Roadmap Earnings per Share).
- The conversion feature is nonsubstantive at inception and becomes exercisable only upon the exercise of a call option (see Section 6.6.2 of Deloitte’s Roadmap Earnings per Share).
- The embedded conversion option is separated as a derivative under ASC 815-15 (see Section 6.6.3 of Deloitte’s Roadmap Earnings per Share).
- The issuer has elected the fair value option in ASC 815-15 or ASC 825-10 (see Section 6.6.4 of Deloitte’s Roadmap Earnings per Share).
- The convertible debt contains an embedded put or call option (see Section 6.6.5 of Deloitte’s Roadmap Earnings per Share).
- The conversion feature is contingent (see Section 4.4.3 of Deloitte’s Roadmap Earnings per Share).
In addition, ASC 470-20-45-2A contains EPS guidance for own-share lending
arrangements executed in contemplation of a convertible debt offering or
other financing. Under this guidance, loaned shares are excluded from EPS
unless the counterparty to the arrangement defaults on its obligation to
return the loaned shares (or an equivalent amount of consideration). If the
counterparty defaults, the shares are included in both basic and diluted
EPS. (Note that under ASC 470-20-45-2A, the counterparty would need to
default for the loaned shares to be included in EPS, whereas under ASC
470-20-35-11A, the counterparty’s default must be probable for a loss to be
recognized.)
In practice, own-share lending arrangements often require the counterparty to
reimburse the issuer for any dividends paid on the loaned shares. If the
counterparty does not reimburse the issuer for such dividends, however, the
issuer must deduct the corresponding amount and any participation right in
undistributed earnings from income available to common stockholders.
For more discussion of the EPS accounting for own-share lending arrangements,
see Deloitte’s Roadmap Earnings per
Share, in particular Sections
3.3.2.8, 4.8.3.5,
5.3.3.9, and 8.5.
14.3.3.3 Contracts That May Be Settled in Stock or Cash
Some debt instruments allow for settlement in stock or cash (e.g., certain
convertible debt and variable-share settleable instruments). The specific
guidance in ASC 260 on diluted EPS applies to contracts that may be settled
in such a manner whether the option to elect the form of settlement is
controlled by the entity or the counterparty to the arrangement. ASC
260-10-45-45 states:
The effect of potential share settlement shall be
included in the diluted EPS calculation (if the effect is more dilutive)
for an otherwise cash-settleable instrument that contains a provision
that requires or permits share settlement (regardless of whether the
election is at the option of an entity or the holder, or the entity has
a history or policy of cash settlement). An example of such a contract
accounted for in accordance with this paragraph and paragraph
260-10-45-46 is a written call option that gives the holder a choice of
settling in common stock or in cash. An election to share settle an
instrument, for purposes of applying the guidance in this paragraph,
does not include circumstances in which share settlement is contingent
upon the occurrence of a specified event or circumstance (such as
contingently issuable shares). In those circumstances (other than if the
contingency is an entity’s own share price), the guidance on
contingently issuable shares should first be applied, and, if the
contingency would be considered met, then the guidance in this paragraph
should be applied. Share-based payment arrangements that are payable in
common stock or in cash at the election of either the entity or the
grantee shall be accounted for pursuant to this paragraph and paragraph
260-10-45-46, unless the share-based payment arrangement is classified
as a liability because of the requirements in paragraph 718-10-25-15
(see paragraph 260-10-45-45A for guidance for those instruments). If the
payment of cash is required only upon the final liquidation of an
entity, then the entity shall include the effect of potential share
settlement in the diluted EPS calculation until the liquidation occurs.
Except for certain share-based payment arrangements, an
entity must assume in the calculation of diluted EPS that any contract that
allows for settlement in shares will be settled in shares. This assumption
must be made regardless of (1) the likelihood of share settlement or (2) the
intent of the party that has the right to elect settlement in stock or cash.
Accordingly, an entity uses the if-converted method to include potential
common shares in the denominator of diluted EPS when a debt instrument may
be settled in stock or cash at the option of the issuer or investor. The
numerator in the calculation of diluted EPS may also need to be adjusted for
these instruments. For more information about the accounting for diluted EPS
for contracts that may be settled in stock or cash, see Section 4.7 of
Deloitte’s Roadmap Earnings per Share.
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]
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)). . . .
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]
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. . . .
(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]
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)). . . .
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):
- The contractual interest expense
- 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:
- The number of shares
- The term
- The circumstances under which cash settlement would be required
- 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
50-9
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.
50-27 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:
- A description of those similar items and the reasons for partial election
- 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:
- 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.)
- 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:
- A description of those similar items and the reasons for partial election
- 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:
- A description of those similar items and the reasons for partial election
- 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.