1.2 Scope

The following table indicates whether ASC 470-20 addresses classification and measurement requirements that might apply to different types of convertible debt instruments and where those requirements are discussed in detail in this Roadmap:

Type	Description	Addressed in ASC 470-20	Roadmap Discussion
Traditional convertible debt	Convertible debt to which no special accounting approach applies	Yes	Chapter 4
Convertible debt issued at a substantial premium to par	Convertible debt that was issued at a substantial premium to par and to which no other special accounting approach applies	Yes	Chapter 5
Cash conversion feature (CCF)	Debt (or liability-classified stock) that may be settled in whole or in part in cash upon conversion unless the conversion feature is required to be separated as an embedded derivative	Yes	Chapter 6
Beneficial conversion feature (BCF)	Debt that contains a conversion feature that is beneficial to the holder unless that feature is required to be separated as an embedded derivative or as an equity component under the CCF requirements	Yes	Chapter 7
Embedded derivative	Debt that contains an embedded feature (e.g., a conversion option, a put or call option, or a contingent interest provision) that is required to be separated from its host contract and accounted for as a derivative instrument under ASC 815	No	Sections 2.3 and 2.4 and Appendixes A and B
Interest method	Debt (or a debt host that remains after separation of an embedded derivative, or a liability component that remains after separation of an equity component)	Some aspects	Sections 4.4, 5.4, 6.4, and 7.4
Fair value option	Debt that does not contain a separated equity component (elective)	No	Section 2.5
Temporary equity	Convertible debt instruments that contain a separately recognized equity component that must be classified outside of permanent equity because the instruments are redeemable for cash (1) at a fixed or determinable date or (2) upon the occurrence of an event that is outside the issuer’s control	No	Section 2.6

Further, if a convertible instrument is issued in the form of a share, the issuer should determine whether the instrument is required to be classified as a liability under ASC 480-10 before evaluating the potential applicability of other approaches for convertible instruments. If such classification is required and the instrument contains a CCF, it may be subject to the CCF guidance in ASC 470-20 (see Section 6.2.2). Note that this Roadmap only addresses convertible instruments issued in the form of a share that require classification as a liability. For further discussion of the requirements in ASC 470-20 that apply to equity-classified convertible preferred stock, see Deloitte’s Roadmap Earnings per Share.

Under U.S. GAAP, there are multiple approaches to the derecognition of convertible debt:

Approach	Addressed in ASC 470-20	Roadmap Discussion
Approach	Addressed in ASC 470-20	Traditional Convertible Debt	CCFs	BCFs
Conversion in accordance with the original terms	Yes	Section 4.5.2	Section 6.5.1	Section 7.6.1
Conversion upon the issuer’s exercise of a call option	Yes	Section 4.5.3	Section 6.5.1	Section 7.6.1
Induced conversion	Yes	Section 4.5.4	Section 6.5.2	Section 7.6.1
Debt extinguishment	Some aspects	Section 4.5.5	Section 6.5.1	Section 7.6.2
Debt modification or exchange	Some aspects	Section 4.5.6	Section 6.5.3	Section 7.6.3
Troubled debt restructuring (TDR)	No	Section 4.5.7	Section 4.5.7	Section 4.5.7
Related-party transaction	No	Section 4.5.5.3	Section 4.5.5.3	Section 4.5.5.3

ASC 470-20 also includes guidance on accounting for equity-classified own-share lending arrangements that are issued in contemplation of a convertible debt issuance or other financing (see Chapter 8).

Entities that apply both U.S. GAAP and the equivalent guidance in IFRS® Accounting Standards should note that there are significant differences between the two sets of guidance. See Chapter 9 for a discussion of those differences.

Appendix D of this Roadmap contains the definitions of selected terms from ASC 470-20 and the ASC master glossary.

Practitioners still sometimes refer to the original accounting pronouncements that were in effect before the FASB’s codification of U.S. GAAP in 2009 (e.g., APB Opinion 14, FSP APB 14-1, FASB Statement 84, and EITF Issues 98-5 and 00-27). The FASB’s August 4, 2016, Invitation to Comment, Agenda Consultation, notes that “practice continues to use the legacy literature rather than the Accounting Standards Codification to address issues about the classification of specific instruments as either liabilities or equity,” in part because “[c]omplexity and difficulties with interpretation and application were not addressed when the FASB developed the Accounting Standards Codification.” However, the texts of those original pronouncements are no longer recognized as sources of authoritative GAAP.

This Roadmap includes excerpts from some of the tentative guidance and bases for conclusions that were referred to or included in those original pronouncements. While nonauthoritative, these texts can help practitioners interpret and apply GAAP requirements in a manner consistent with their purpose. Appendix C of this Roadmap contains a list of pronouncements that were codified in ASC 470-20.

Connecting the Dots

For further discussion of some of the requirements that are not in ASC 470-20 but may nevertheless affect the accounting for convertible debt instruments, see Deloitte’s Roadmaps Contracts on an Entity’s Own Equity (which addresses ASC 815-40) and Distinguishing Liabilities From Equity (which addresses ASC 480-10).

The following ASUs have amended the guidance in ASC 470-20:

ASU 2009-15 (issued in October 2009) incorporated the EITF’s consensus on accounting for own-share lending arrangements in contemplation of a convertible debt issuance or other financing (see Chapter 8).
ASU 2012-04 (issued in October 2012) made certain technical corrections related to BCFs (see Chapter 7) to conform the Codification to the pre-Codification guidance in EITF Issue 00-27.
ASU 2015-01 (issued in January 2015) removed the concept of extraordinary items.
ASU 2016-19 (issued in December 2016) removed the previous definition of the term debt (see Section 2.2).
ASU 2018-07 (issued in June 2018) revised certain requirements related to convertible instruments issued to nonemployees for goods or services (see Section 2.8).
ASU 2019-08 (issued in November 2019) amended ASC 470-20 to clarify the measurement of convertible instruments that are issued as consideration payable to a customer (see Section 2.8).
ASU 2020-06 (issued in August 2020) amended ASC 470-20 to significantly change an issuer’s accounting for convertible debt (see the Changing Lanes discussion below).

With the exception of ASU 2020-06, it is assumed in this Roadmap that an entity has adopted the ASUs listed above. Entities that have adopted ASU 2020-06 should not use the guidance in this publication.

Changing Lanes

In August 2020, the FASB issued ASU 2020-06, which simplifies and significantly changes an issuer’s accounting and disclosure for convertible debt instruments. The ASU removes the separation models in ASC 470-20 for (1) convertible debt with a CCF and (2) convertible instruments with a BCF. As a result, after adopting the ASU’s guidance, an entity will generally not separately present embedded conversion features in equity under ASC 470-20 when initially recognizing a convertible instrument. Instead, it will account for a convertible debt instrument wholly as debt (i.e., as a single unit of account) unless the instrument contains features that require bifurcation as a derivative under ASC 815.

Note that because of these changes, the guidance in Chapters 6 and 7 of this Roadmap will no longer apply once an entity has adopted ASU 2020-06. In addition, the guidance in the remaining chapters in this publication will be affected by the amendments made by ASU 2020-06. For example, ASU 2020-06 amends the earnings per share (EPS) guidance that applies to convertible debt instruments as well as the conditions in ASC 815-40 that an issuer must meet to avoid bifurcating the embedded conversion option.

The application of the existing separation models in ASC 470-20 involves the recognition of a debt discount, which is amortized to interest expense for convertible instruments with a BCF or CCF. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued convertible debt within the scope of those models. However, entities will need to apply the if-converted method, as opposed to other methods, to calculate the diluted EPS effect from convertible debt instruments.

ASU 2020-06 is effective as follows:

For public business entities that are not smaller reporting companies, fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.
For all other entities, fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Deloitte’s Roadmap Issuer’s Accounting for Debt addresses an issuer’s accounting for convertible debt after adoption of ASU 2020-06.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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