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Appendix A — Embedded Derivative Analysis

A.4 Conversion Option May Be Net Cash Settled Upon Contingent Event

A.4 Conversion Option May Be Net Cash Settled Upon Contingent Event

If the investor in a convertible debt instrument (with a debt host contract) can net cash settle the embedded conversion option solely upon the passage of time, the option would not be classified in equity if it were a freestanding instrument. In such a case, if the option also met the bifurcation conditions in ASC 815-15-25-1(a) and (b), it would be a derivative that required bifurcation under ASC 815. However, if the investor’s ability to net cash settle the conversion option is contingent on an event other than the passage of time and that event is outside the issuer’s control, further analysis would be required, especially under ASC 815-40-25.

Footnotes

1
In certain limited circumstances described in ASC 815-40-25-7 through 25-9, net cash settlement would not necessarily preclude equity classification.