2.2 General Considerations
ASC 470-20
05-1 This Subtopic provides accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features and other options as follows:
- Debt instruments with detachable warrants
- Convertible securities — general
- Beneficial conversion features
- Interest forfeiture
- Induced conversions
- Conversion upon issuer’s exercise of call option
- Convertible instruments issued to nonemployees for goods and services
- Own-share lending arrangements issued in contemplation of convertible debt issuance.
05-1A This Subtopic presents guidance in the following two Subsections:
- General
- Cash Conversion
15-1 The guidance in this Subtopic applies to all entities.
15-2 The guidance in this
Subtopic applies to all debt instruments. The guidance on
beneficial conversion features and conversion features that
reset applies also to convertible preferred stock. The
guidance in the General Subsections does not apply to those
instruments within the scope of the Cash Conversion
Subsections. The guidance on own-share lending arrangements
applies to an equity-classified share-lending arrangement on
an entity’s own shares when executed in contemplation of a
convertible debt offering or other financing.
The guidance in ASC 470-20 applies to both public business entities (including SEC registrants) and
private companies that are issuers of instruments within its scope.
ASC 470-20 provides guidance on the issuer’s accounting for the following financial instruments:
- Convertible debt (i.e., debt instruments that contain a feature that requires or permits conversion into the issuer’s equity shares), including:
- Convertible shares (i.e., shares that require or permit conversion into a different class of the issuer’s equity shares):
- Liability-classified shares with a CCF (see Section 6.2.2).
- Equity-classified shares with a BCF.1
- Own-share lending arrangements executed in contemplation of a convertible debt issuance (see Chapter 8).
- Debt issued with detachable warrants (or options) on the issuer’s equity shares (see Sections 3.4.2.3 and 4.5.2.3).
- Debt exchangeable for third-party stock (see Section 2.7).
- Convertible instruments issued to nonemployees for goods or services (see Section 2.8).
Although ASC 470-20-15-2 specifies that ASC 470-20 applies broadly to debt instruments, most of its
guidance only addresses debt instruments that are convertible into the issuer’s equity shares. However,
ASC 470-20 applies to certain aspects of the accounting for debt issued with detachable warrants (or
options) on the issuer’s equity shares (see Sections 3.4.2.3 and 4.5.2.3). In determining the appropriate
accounting for debt that does not contain a conversion feature, an entity considers other accounting
guidance, including ASC 470-10, ASC 470-50, ASC 470-60, ASC 825-10, and ASC 835-30.
The ASC master glossary and ASC 470-20-20 previously included a definition of
the term “debt” that specified that it involves “a contractual obligation to pay
money on demand or on fixed or determinable dates.” However, in ASU 2016-19, the FASB
removed the definition because the Board did not consider it “to be robust enough”
in contexts other than TDRs (e.g., part of the definition linked the term to
restructuring situations).
Although ASC 470-20 is in the liabilities area of the Codification and the titles of ASC 470 and ASC 470-20
suggest that they address debt, some of the guidance in ASC 470-20 also applies to instruments in
the form of shares as well as certain equity-classified share-lending arrangements. Thus, ASC 470-20
contains guidance on convertible shares that either (1) contain a CCF and are required to be classified
as liabilities under ASC 480-10-15-4 (see Section 6.2.2) or (2) contain a BCF even if they are classified as
equity. Further, ASC 470-20 contains accounting guidance that applies to equity-classified share-lending
arrangements on the entity’s own shares for arrangements that were entered into in contemplation
of a convertible debt offering or other financing (see Chapter 8). The issuer applies ASC 480-10 and
ASC 815-40 to evaluate whether the arrangement qualifies as equity.
Connecting the Dots
For a discussion of how an issuer evaluates whether a financial instrument
qualifies as equity, 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.
This Roadmap only addresses accounting considerations for convertible instruments in the form of debt and convertible instruments issued in the form of a share that require classification as a liability (i.e., convertible instruments classified in permanent or temporary equity are not specifically addressed). Therefore, the term “convertible debt instruments” in this publication refers exclusively to those instruments.
Footnotes
1
As discussed below, this Roadmap
only addresses accounting considerations for
convertible instruments issued in the form of a
share that are classified as liabilities.