2.3 Instruments

2.3.1 Background

This Roadmap addresses the issuer’s accounting for debt (see the next section) and the potential borrower’s accounting for commitments to obtain debt financing (see Section 2.3.3), both of which represent financial instruments (see Section 2.3.4). Debt obligations are financial liabilities (see Section 2.3.5). Sections 2.3.2.4 and 2.3.6 identify topics that are beyond the scope of this Roadmap.

2.3.2 Debt

2.3.2.1 General

ASC 835-30

15-2 The guidance in this Subtopic applies to receivables and payables that represent contractual rights to receive money or contractual obligations to pay money on fixed or determinable dates, whether or not there is any stated provision for interest, with certain exceptions noted below. Such receivables and payables are collectively referred to in this Subtopic as notes. Some examples are the following:

Secured and unsecured notes
Debentures
Bonds
Mortgage notes
Equipment obligations
Some accounts receivable and payable.

ASC 470-60

15-4A In this Subtopic, a receivable or a payable (collectively referred to as debt) represents a contractual right to receive money or a contractual obligation to pay money on demand or on fixed or determinable dates that is already included as an asset or a liability in the creditor’s or debtor’s balance sheet at the time of the restructuring.

The types of debt addressed in this Roadmap include loans, bonds, notes, and other kinds of debt securities and payables, including convertible debt. In a manner generally similar to the description of a “note” in ASC 835-30-15-2 and “debt” in ASC 470-60-15-4A, the Roadmap uses the term “debt” to describe contractual obligations to pay money on demand or on fixed or determinable dates irrespective of whether such obligations contain any stated provision for interest.

The scope of this Roadmap is limited to the accounting by the party that has a contractual obligation (liability) to pay the debt. The terms that describe such a party — including issuer, debtor, borrower, or obligor — are used interchangeably in the Roadmap unless otherwise specified. The Roadmap does not address the accounting by the party that has a contractual right (asset) to collect the debt (i.e., the party described as the holder, creditor, lender, investor, or finance provider).

An issuer should account for an instrument that represents a legal-form debt obligation as debt even if it has certain economic characteristics that are similar to those of an equity instrument, such as perpetual debt. For example, a convertible preferred equity certificate or another instrument that represents a legal-form debt obligation in the jurisdiction in which it is issued and carries creditor rights (e.g., an ability to seek recourse in a bankruptcy court) should be accounted for as debt even if the issuer has only 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), (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 an entity legally represents debt or equity, the entity may need to seek advice from legal counsel.

2.3.2.2 Convertible Debt

ASC 470-20

05-4 A convertible debt instrument is a complex hybrid instrument bearing an option, the alternative choices of which cannot exist independently of one another. The holder ordinarily does not sell one right and retain the other. Furthermore, the two choices are mutually exclusive; they cannot both be consummated. Thus, the instrument will either be converted or be redeemed. The holder cannot exercise the option to convert unless he forgoes the right to redemption, and vice versa.

05-5 A convertible debt instrument may offer advantages to both the issuer and the purchaser. From the point of view of the issuer, convertible debt has a lower interest rate than does nonconvertible debt. Furthermore, the issuer of convertible debt instruments, in planning its long-range financing, may view convertible debt as essentially a means of raising equity capital. Thus, if the fair value of the underlying common stock increases sufficiently in the future, the issuer can force conversion of the convertible debt into common stock by calling the issue for redemption. Under these market conditions, the issuer can effectively terminate the conversion option and eliminate the debt. If the fair value of the stock does not increase sufficiently to result in conversion of the debt, the issuer will have received the benefit of the cash proceeds to the scheduled maturity dates at a relatively low cash interest cost.

05-6 On the other hand, the purchaser obtains an option to receive either the face or redemption amount of the instrument or the number of common shares into which the instrument is convertible. If the fair value of the underlying common stock increases above the conversion price, the purchaser (either through conversion or through holding the convertible debt containing the conversion option) benefits through appreciation. The purchaser may at that time require the issuance of the common stock at a price lower than the fair value. However, should the fair value of the underlying common stock not increase in the future, the purchaser has the protection of a debt security. Thus, in the absence of default by the issuer, the purchaser would receive the principal and interest if the conversion option is not exercised.

05-7 Entities may issue convertible debt instruments that may be convertible into common stock at the lower of a conversion rate fixed at time of issuance and a fixed discount to the market price of the common stock at the date of conversion.

05-7A Entities also may issue convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement.

05-8 Certain convertible debt instruments may have a contingently adjustable conversion ratio; that is, a conversion price that is variable based on future events such as any of the following:

A liquidation or a change in control of an entity
A subsequent round of financing at a price lower than the convertible security’s original conversion price

An initial public offering at a share price lower than an agreed-upon amount.

05-8A Certain convertible debt instruments may become convertible only upon the occurrence of a future event that is outside the control of the issuer or holder.

Convertible debt is debt that contains a feature that requires or permits its conversion into the issuer’s equity shares. Economically, a convertible debt instrument is similar to the combination of (1) a debt obligation with a below-market interest coupon and (2) an equity conversion option. Investors are willing to accept a below-market interest rate on their investment because they also receive an equity conversion option. Because convertible debt is usually accounted for entirely as debt (see Section 7.6), it may appear that the issuer is able to borrow at a below-market rate; however, this ignores the fact that the issuer has given the investors a valuable equity conversion option in exchange for the low interest rate. In the absence of a conversion feature, the issuer would have to pay a higher rate that is commensurate with its nonconvertible debt borrowing rate.

Convertible debt issued by public companies often contains CCFs that require or permit the issuer to settle all or part of the instrument’s conversion value by transferring cash or other assets upon conversion. In practice, there are four types of such instruments:

	Settlement Provision	Description
Instrument A	Cash settlement	Upon conversion, the issuer must fulfill the obligation entirely in cash on the basis of the fixed number of shares multiplied by the price of the stock on the conversion date (the “conversion value”).
Instrument B	Issuer option to elect either cash or physical share settlement	Upon conversion, the issuer may elect to fulfill the entire obligation by using either stock or cash equivalent to the conversion value.
Instrument C	Cash settlement of accreted value and issuer option to elect either net cash or net share settlement of conversion spread	Upon conversion, the issuer (1) must use cash to settle the accreted value of the obligation (the amount accrued to the benefit of the holder minus the conversion spread) and (2) may use either cash or stock to settle the conversion spread (the excess conversion value divided by the accreted value).
Instrument X	Combination settlement	Upon conversion, the issuer may settle the accreted value and conversion spread in any combination of cash or shares.

Example 2-1

Variants of Convertible Debt With a CCF

The table below illustrates how Instruments A, B, C, and X, as described above, would be settled if they each have an accreted value of $1 million, are convertible into 10,000 shares, and the current stock price at the time of conversion is $125.

Type	Settlement Upon Conversion
Instrument A	The issuer must pay cash of $1.25 million (10,000 shares × $125).
Instrument B	The issuer can elect to either deliver 10,000 equity shares or pay cash of $1.25 million (10,000 shares × $125).
Instrument C	The issuer must pay $1 million of cash to settle the accreted value of the debt obligation. To settle the conversion spread, the issuer can elect to either deliver 2,000 equity shares ($250,000 ÷ $125) or pay $250,000 of cash.
Instrument X	The issuer can elect to deliver any combination of cash and shares whose aggregate value equals $1.25 million (e.g., 1,000 shares and $1.125 million of cash).

Section 7.6 discusses the issuer’s accounting for convertible debt.

2.3.2.2.1 Convertible Debt Issued for Goods or Services

ASC 470-20

15-2C The guidance in this Subtopic does not apply to a convertible debt instrument award issued to a grantee that is subject to the guidance in Topic 718 on stock compensation unless the instrument is modified as described in and no longer subject to the guidance in that Topic. . . .

ASC 718 addresses the issuer’s accounting for a convertible debt instrument that is issued to an employee for services, to a nonemployee for goods or services, or to a customer. A convertible debt instrument that is within the scope of the initial recognition and measurement guidance in ASC 718 because it was granted to an employee or nonemployee in exchange for goods or services remains within the scope of that guidance throughout its life unless its terms are modified after it has been vested and the grantee is no longer providing goods or services or is no longer a customer. Any interest that is paid or payable on such instruments is treated as compensation cost rather than as a financing cost. Under ASC 718, unvested convertible debt instruments granted in exchange for goods and services are treated as unissued for accounting purposes until those goods or services have been received. For more information about the issuer’s accounting for convertible debt instruments within the scope of ASC 718, see Deloitte’s Roadmap Share-Based Payment Awards.

2.3.2.3 Share-Settled Debt

ASC 470-20

15-2C . . . The guidance in this Subtopic does not apply to stock-settled debt that is subject to the guidance in Subtopic 480-10 on distinguishing liabilities from equity or other Subtopics (see paragraph 470-20-25-14), unless the stock-settled debt also contains a substantive conversion feature (as discussed in paragraphs 470-20-40-7 through 40-10) for which all relevant guidance in this Subtopic shall be considered in addition to the relevant guidance in other Subtopics.

15-2D For purposes of determining whether an instrument is within the scope of this Subtopic, a convertible preferred stock shall be considered a convertible debt instrument if it has both of the following characteristics:

It is a mandatorily redeemable financial instrument.
It is classified as a liability under Subtopic 480-10.

For related implementation guidance, see paragraph 470-20-55-1A.

25-14 If a debt instrument has a conversion option that continuously resets as the underlying stock price increases or decreases so as to provide a fixed value of common stock to the holder at any conversion date, the instrument shall be considered stock-settled debt that is subject to the guidance in Subtopic 480-10 or other Subtopics (such as Subtopic 718-10, 815-15, or 825-10). Example 4 (see paragraph 470-20-55-18) illustrates application of the guidance in this paragraph.

55-1A An example of a convertible preferred stock that paragraph 470-20-15-2D requires an entity consider as a convertible debt instrument for purposes of the scope application of this Subtopic is a convertible preferred stock that has a stated redemption date and also would require the issuer to settle the face amount of the instrument in cash upon exercise of the conversion option. Such a convertible preferred stock is a mandatorily redeemable financial instrument and is classified as a liability under Subtopic 480-10 because it embodies an unconditional obligation to redeem the instrument by transferring assets at a specified or determinable date (or dates).

Example 4: Stock-Settled Debt

55-18 This Example illustrates the guidance in paragraph 470-20-25-14.

55-19 If the conversion price was described as $1 million divided by the market price of the common stock on the date of the conversion, that is, resetting at the date of conversion, the holder is guaranteed to receive $1 million in value upon conversion and, therefore, the debt instrument would be considered stock-settled debt.

ASC 480-10

25-14 A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following:

A fixed monetary amount known at inception (for example, a payable settleable with a variable number of the issuer’s equity shares)
Variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor’s S&P 500 Index and settleable with a variable number of the issuer’s equity shares)
Variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled). . . .

A financial instrument such as debt or preferred stock may contain a term that is described as a “conversion” feature but economically represents a share-settled redemption provision. That is, the number of equity shares to be delivered upon conversion is variable and is calculated on the settlement date to be equal in value to a fixed or specified monetary amount (e.g., the principal amount plus accrued and unpaid interest) or a monetary amount that is indexed to an unrelated underlying (e.g., the price of gold). If the conversion price is contractually defined as the current stock price upon conversion, for example, the monetary value of the shares delivered will equal the instrument’s principal or stated amount.

Even if the terms of the instrument refer to the share-settled feature as a conversion feature, the issuer should not analyze it as such under GAAP since a share-settled feature does not have the economic payoff profile of an equity conversion feature. Instead, the issuer should (1) evaluate the feature as a put, call, redemption, or other indexed feature, as applicable, and (2) determine whether the feature must be separated as a derivative instrument under ASC 815-15. For a discussion of the evaluation of whether a share-settled redemption feature embedded in a debt host contract should be separated as a derivative instrument, see Sections 8.4.4 and 8.4.7.2.5.

Legal-form debt instruments are always classified as liabilities under GAAP. If an instrument with a share-settled redemption provision is issued in the form of an equity share such as preferred stock, the issuer should evaluate whether the instrument must be classified as a liability under ASC 480. In addition, the issuer should evaluate whether the instrument contains a substantive conversion feature, in which case the issuer would apply ASC 470-20 as well as other relevant guidance.

Under ASC 480, liability classification is required for outstanding financial instruments that embody an unconditional obligation — or for outstanding financial instruments other than outstanding shares that embody a conditional obligation — that the issuer must or may settle by issuing a variable number of its equity shares if the obligation’s monetary value is based solely or predominantly on one of the following: (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuer’s equity shares, or (3) variations inversely related to changes in the fair value of the issuer’s equity shares (see Chapter 6 of Deloitte’s Roadmap Distinguishing Liabilities From Equity).

Outstanding financial instruments that are classified as liabilities under ASC 480-10-25-14(a) are often described as share-settled debt even if they do not represent legal-form debt (e.g., because of an absence of creditor rights). If the monetary value of such obligations represents a fixed or predominantly fixed monetary amount known at inception, the obligations should be accounted for in a manner similar to legal-form debt as discussed in this Roadmap (i.e., in accordance with the interest method in ASC 835-30 unless the fair value option in ASC 825-10 is elected; see Chapter 6). For example, if $100,000 worth of equity shares must be issued to settle a financial instrument, the association that is established is more akin to a debtor-creditor relationship than an ownership relationship.

Other variable-share obligations that are liabilities under ASC 480-10-25-14(b) and (c) must be accounted for at fair value under ASC 480-10-35-5. However, the last sentence of ASC 480-10-55-22 implicitly acknowledges that a fixed-monetary-value share-settled debt arrangement does not need to be measured at fair value through earnings under ASC 480.1 ASC 480-10-55-22 addresses whether an entity should recognize a gain or loss related to the difference between the average and ending market price upon the settlement of a share-settled debt arrangement for which the entity used an average stock price rather than the ending stock price to determine the number of shares that will be delivered. If the instrument described in ASC 480-10-55-22 had been measured on an ongoing basis at fair value (i.e., on the basis of a current stock price), there would have been no difference to address at settlement after the issuer had updated its prior fair value estimate. Since these types of liabilities are accounted for at amortized cost (when the fair value option has not been elected), they are addressed in this Roadmap.

For a comprehensive discussion of the classification and measurement requirements in ASC 480, see Deloitte’s Roadmap Distinguishing Liabilities From Equity.

2.3.2.4 Certain Obligations With Characteristics Similar to Debt

This Roadmap does not directly, comprehensively address all of the accounting requirements for the following types of liability-classified instruments:

Liabilities for product financing arrangements within the scope of ASC 470-40, such as contracts in which an entity arranges for another entity to purchase a product on its behalf and agrees to purchase the product from that other entity (see ASC 470-40-05-2(b)). However, the Roadmap’s guidance would generally be relevant to such liabilities because ASC 470-40 does not provide specific requirements related to their subsequent measurement other than to state that they must be accounted for as borrowings (see ASC 470-40-25-1).
Mandatorily redeemable financial instruments that are classified as liabilities under ASC 480-10-25-4. For a discussion of the accounting for such liabilities, see Chapter 4 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.
Instruments that embody an obligation to deliver a variable number of shares and are classified as liabilities under ASC 480-10-25-14(b) and (c). For a discussion of the accounting for such liabilities, see Chapter 6 of Deloitte’s Roadmap Distinguishing Liabilities From Equity. The guidance in this Roadmap is relevant to the accounting for share-settled debt that is classified as a liability under ASC 480-10-25-14(a) (see Section 2.3.2.3).
Liabilities for repurchase agreements with customers that are within the scope of ASC 606. For a discussion of the accounting guidance for such agreements, see Deloitte’s Roadmap Revenue Recognition. The guidance in this Roadmap may be relevant to financial liabilities recognized under ASC 606-10-55-70.
Liabilities of collateralized financing entities, which are addressed in ASC 810 and ASC 825. For a discussion of the accounting for such liabilities, see Sections 10.1.3 and 10.2.2 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest and Section 12.4.1.2.2.1.1 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).
Financial liabilities recognized under leases within the scope of ASC 842. For a discussion of that guidance, see Deloitte’s Roadmap Leases.
Secured borrowings that are recognized under ASC 860-30-25-2 upon a transfer of financial assets that does not meet the conditions for sale accounting in ASC 860-10-40-5 (see Deloitte’s Roadmap Transfers and Servicing of Financial Assets). However, the Roadmap’s guidance would generally be relevant to such liabilities because ASC 860-30 does not specify the manner in which they are subsequently measured and instead requires entities to measure them in accordance with other relevant accounting guidance (see ASC 860-30-35-3).
Deposit liabilities of depository institutions, which are addressed in ASC 942-405 and ASC 942-470.
Obligations incurred in short sales, which are addressed in ASC 815-10-55-57 through 55-59 and ASC 942-405-25-1.

2.3.2.5 Pushdown of Parent Debt to a Subsidiary

If a parent entity issues debt to a third party and is the sole legal obligor under the arrangement but expects to repay the debt by using a consolidated subsidiary’s assets (e.g., the parent is a shell company and the plan is for the subsidiary to issue dividends to the parent so the parent can pay principal and interest), questions may arise about whether the subsidiary should record the debt in its separate stand-alone financial statements. Since the parent is the sole legal obligor, the subsidiary would not need to record the debt in its stand-alone financial statements. This is because the parent may expand its business or create or acquire other subsidiaries or operations that generate the cash flows needed to repay the debt. In addition, the subsidiary would not be required to record the interest expense on such debt; however, it should adequately disclose the payment arrangement, including any guarantees of repayment of the debt.

The above guidance does not address the accounting by securitization structures that may involve multiple legal entities.

For guidance on joint-and-several liability arrangements involving related parties, see Section 7.5. For guidance on the preparation of carve-out financial statements, see Section 2.4 of Deloitte’s Roadmap Carve-Out Financial Statements.

2.3.3 Loan Commitments

ASC Master Glossary

Line-of-Credit Arrangement

A line-of-credit or revolving-debt arrangement is an agreement that provides the borrower with the option to make multiple borrowings up to a specified maximum amount, to repay portions of previous borrowings, and to then reborrow under the same contract. Line-of-credit and revolving-debt arrangements may include both amounts drawn by the debtor (a debt instrument) and a commitment by the creditor to make additional amounts available to the debtor under predefined terms (a loan commitment).

Loan Commitment

Loan commitments are legally binding commitments to extend credit to a counterparty under certain prespecified terms and conditions. They have fixed expiration dates and may either be fixed-rate or variable-rate. Loan commitments can be either of the following:

Revolving (in which the amount of the overall commitment is reestablished upon repayment of previously drawn amounts)
Nonrevolving (in which the amount of the overall commitment is not reestablished upon repayment of previously drawn amounts).

Loan commitments can be distributed through syndication arrangements, in which one entity acts as a lead and an agent on behalf of other entities that will each extend credit to a single borrower. Loan commitments generally permit the lender to terminate the arrangement under the terms of covenants negotiated under the agreement.

In addition to the issuer’s accounting for debt, this Roadmap addresses the potential borrower’s accounting for loan commitments, including line-of-credit arrangements, revolving-debt arrangements, delayed-draw term loan commitments, and commitments to issue debt securities. The contractual terms of loan commitments may specify the timing and amount of the debt that the entity might draw, conditions that must be met to draw down committed amounts (e.g., financial or operational conditions, such as the satisfaction of business milestones), the applicable interest rate or index, and repayment terms.

Loan commitments are either revolving or nonrevolving:

Nonrevolving loan commitment (including delayed-draw debt and term loan commitments) — Once a funded loan has been repaid, those amounts cannot be reborrowed. Some nonrevolving loan commitments involve multiple tranches. For example, a tranche financing agreement might involve the issuance of an initial tranche of term debt that is funded when the contract is executed and one or more future tranches of committed term debt that will be funded on future closing dates (see Example 3-2).
Revolving loan commitment (including line-of-credit or revolving-debt arrangements) — Repaid amounts can be reborrowed. That is, the potential debtor can make multiple borrowings up to a specified maximum amount, repay borrowed amounts, and reborrow.

The potential debtor’s accounting for loan commitments tends to center on (1) the treatment of any costs and fees that an entity has incurred to obtain such commitments (see Chapter 5), (2) the accounting for modifications and exchanges of commitments (see Section 10.6), and (3) the impact of the existence of commitments on the classification of debt as current or noncurrent in a classified balance sheet (see Section 13.7). Further, the potential debtor should consider whether to account for a freestanding loan commitment as a derivative (see below). When a credit facility or tranche debt financing arrangement includes both drawn and undrawn components, the debtor should also appropriately identify the units of account (e.g., whether commitments to obtain additional term loans on future closing dates represent freestanding financial instruments or features embedded in a debt host contract; see Section 3.3). If a term loan commitment is embedded in a debt host contract, the debtor should evaluate whether the commitment should be separated as a derivative (see Section 8.4.6).

In many cases, a commitment to obtain debt financing is exempt from derivative accounting under ASC 815, even if it meets the characteristics of a derivative in ASC 815-10-15-83, because ASC 815-10-15-69 specifies that ASC 815-10 does not apply to the holder’s (i.e., potential borrower’s) accounting for “a commitment to originate a loan.” This scope exception applies irrespective of whether (1) the commitment is conditional or (2) the loan is revolving or nonrevolving. Further, it applies even if the funding will be in the form of a debt security. ASC 310-10-20 defines a loan as “[a] contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.” The application of this scope exception to commitments to issue debt securities was informally discussed with members of the SEC staff, who concurred that it may be applied to an entity’s commitment to receive funds in exchange for the initial issuance of a debt security that will be an obligation of the entity.

Example 2-2

Application of Loan Commitment Scope Exception to Issuance of Debt Securities

On July 1, 20X1, Entity E enters into an agreement to issue medium term note debt securities to Purchaser P. On that date, all terms of the securities are negotiated with P, including the settlement date of August 1, 20X1. Once the medium term note debt securities are issued, it is expected that they will be actively traded in a liquid market. Although the commitment to issue the securities meets the characteristics of a derivative in ASC 815-10-15-83, it qualifies for the scope exception in ASC 815-10-15-69. Accordingly, E will not account for its commitment as a derivative.

In a typical loan commitment, the potential creditor writes an option to the potential debtor that permits the potential debtor to obtain debt on prespecified terms at its request. Therefore, the loan commitment scope exception does not apply to an option written by the potential debtor to the potential creditor under which the potential debtor (1) could be forced by the potential creditor to enter into a loan but (2) is not given a right to elect to borrow money from the potential creditor. In this scenario, it may be appropriate to account for the loan commitment at fair value on a recurring basis even if it does not meet the definition of derivative. As stated in ASC 815-10-S99-4, the “SEC staff’s longstanding position is that written options that do not qualify for equity classification initially should be reported at fair value and subsequently marked to fair value through earnings.”

ASC 815 does not clearly address whether the scope exception for loan commitments is available if the loan to be funded contains an embedded feature that will require bifurcation as a derivative once the funding takes place (see Chapter 8). It may therefore be prudent to further evaluate whether the commitment for such loans meets the definition of a derivative in ASC 815. If the loan commitment does not meet the net settlement characteristic in the definition of a derivative (e.g., it requires delivery of an underlying loan that is not readily convertible to cash, and the commitment cannot otherwise be net settled), the debtor may conclude that the loan commitment should not be accounted for as a derivative even if the scope exception for loan commitments is considered inapplicable.

Sometimes loan commitments involve the delivery of debt that is convertible into equity shares that contain redemption requirements (e.g., preferred stock that is redeemable for cash or other assets at the holder’s option or upon the occurrence of an event that is not solely within the issuer’s control). If the potential debtor could be forced to issue such convertible debt (e.g., the potential creditor has the right to waive any funding conditions), the entity should consider whether the loan commitment has the characteristics described in ASC 480-10-25-8 (see Chapter 5 of Deloitte’s Roadmap Distinguishing Liabilities From Equity).

2.3.4 Financial Instruments

ASC Master Glossary

Financial Instrument

Cash, evidence of an ownership interest in an entity, or a contract that both:

Imposes on one entity a contractual obligation either:
1. To deliver cash or another financial instrument to a second entity
2. To exchange other financial instruments on potentially unfavorable terms with the second entity.
Conveys to that second entity a contractual right either:
1. To receive cash or another financial instrument from the first entity
2. To exchange other financial instruments on potentially favorable terms with the first entity.

The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument.

Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements — that is, they may be off-balance-sheet — because they fail to meet some other criterion for recognition.

For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity.

Both outstanding debt and loan commitments meet the FASB’s definition of a financial instrument. They each represent a contract that “[i]mposes on one entity a contractual obligation . . . [t]o deliver cash or another financial instrument to a second entity [and] [c]onveys to that second entity a contractual right . . . [t]o receive cash or another financial instrument from the first entity.” Accordingly, both debt and loan commitments are included within the scope of Codification guidance that specifies that it applies to financial instruments (e.g., the fair value measurement disclosure requirements in ASC 825-10; see Section 14.4.10) unless that guidance specifically exempts them.

The definition of a financial instrument contemplates that contractual rights and contractual obligations may be “conditioned on the occurrence of a specified event.” Therefore, a loan commitment meets the definition of a financial instrument even if the funding of the loan is elective or conditional (e.g., upon the achievement of specified business milestones).

This Roadmap does not address the accounting for items that do not meet the definition of a financial instrument, including:

Noncontractual rights or obligations, such as an obligation to pay taxes imposed by a government.
Contractual rights or obligations that involve the receipt or delivery of nonfinancial items (e.g., an obligation to deliver goods or services, property, plant, equipment, or intangible assets).

2.3.5 Financial Liabilities

ASC Master Glossary

Financial Liability

A contract that imposes on one entity an obligation to do either of the following:

Deliver cash or another financial instrument to a second entity
Exchange other financial instruments on potentially unfavorable terms with the second entity.

From the issuer’s perspective, debt meets the FASB’s definition of a financial liability because it is a “contract that imposes on one entity an obligation to . . . [d]eliver cash or another financial instrument to a second entity.” Accordingly, debt is included within the scope of Codification guidance that specifies that it applies to financial liabilities (e.g., the presentation of changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option in ASC 825-10 has been elected; see Section 6.3.2) unless that guidance provides a specific exemption. A loan commitment that gives the holder a right but does not obligate it to obtain a loan does not meet the definition of a financial liability. This Roadmap does not address the accounting for (1) financial liabilities other than debt or (2) obligations that do not meet the definition of a financial liability.

2.3.6 Topics That Are Beyond the Scope of This Roadmap

While an entity may need to consider guidance on the following topics when it accounts for debt, a detailed discussion of them is beyond the scope of this Roadmap:

Hedge accounting (see Section 14.2.1 and Deloitte’s Roadmap Hedge Accounting).
Fair value measurements (see Section 14.2.2 and Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option)).
Foreign currency matters (see Section 14.2.3 and Deloitte’s Roadmap Foreign Currency Matters).
Capitalization of interest (see Section 14.2.4).
Reference rate reform (see Section 14.2.5).
Balance sheet offsetting (see Section 14.3.1.1).
The preparation of the statement of cash flows (see Section 14.3.2 and Deloitte’s Roadmap Statement of Cash Flows).
The presentation and disclosure of earnings per share (EPS) (see Section 14.3.3 and Deloitte’s Roadmap Earnings per Share).
Business combinations (see Deloitte’s Roadmap Business Combinations).
Consolidation (see Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest).
Specialized industry guidance.

Further, the guidance in this Roadmap does not apply to the accounting for the following liabilities or equity items:

Asset retirement and environmental obligations within the scope of ASC 410 (see Deloitte’s Roadmap Environmental Obligations and Asset Retirement Obligations).
Exit or disposal cost obligations within the scope of ASC 420.
Deferred revenue within the scope of ASC 430.
Unconditional purchase obligations and certain other commitments issued within the scope of ASC 440.
Loss contingencies within the scope of ASC 450 (see Deloitte’s Roadmap Contingencies, Loss Recoveries, and Guarantees).
Guarantee obligations within the scope of ASC 460 (see Deloitte’s Roadmap Contingencies, Loss Recoveries, and Guarantees).
Equity-classified items within the scope of ASC 505.
Contract liabilities within the scope of ASC 606 (see Deloitte’s Roadmap Revenue Recognition).
Employee benefit obligations within the scope of ASC 712, ASC 715, ASC 960, or ASC 962.
Share-based payments for goods or services within the scope of ASC 718 (see Deloitte’s Roadmap Share-Based Payment Awards).
Tax obligations within the scope of ASC 740 (see Deloitte’s Roadmap Income Taxes).
Freestanding derivative contracts within the scope of ASC 815 (see Deloitte’s Roadmap Derivatives).
Servicing liabilities within the scope of ASC 860-50 (see Deloitte’s Roadmap Transfers and Servicing of Financial Assets).
Insurance liabilities within the scope of ASC 944.

Footnotes

However, such arrangements may contain embedded features (e.g., conditional share-settled obligations) that must be separated as embedded derivatives under ASC 815-15 and accounted for at fair value (see Chapter 8).

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.