2.8 Convertible Debt Instrument Issued to Nonemployees in Share-Based Payment Transactions
ASC 470-20
05-12 A convertible instrument that is issued to a nonemployee in exchange for goods or services or a
combination of goods or services and cash and may contain a nondetachable conversion option that permits
the holder to convert the instrument into the issuer’s stock. This Subtopic provides related guidance.
25-17 The guidance in the following paragraph and paragraph 470-20-25-19 addresses a convertible
instrument that is issued or granted to a nonemployee in exchange for goods or services or a combination
of goods or services and cash. The convertible instrument contains a nondetachable conversion option that
permits the holder to convert the instrument into the issuer’s stock.
25-18 Once the instrument is
considered issued for accounting purposes pursuant to
Subtopic 718-10, distributions paid or payable shall be
characterized as financing costs (that is, interest expense
or dividends). Before that time, distributions paid or
payable under the instrument shall be characterized as a
cost of the underlying goods or services.
25-19 If the
convertible instrument is issued for cash proceeds that
indicate that the instrument includes a beneficial
conversion feature and the purchaser of the instrument also
provides (receives) goods or services to (from) the issuer
that are the subject of a separate contract, the convertible
instrument shall be recognized with a corresponding increase
or decrease in the purchase or sales price of the goods or
services.
30-22 To determine the fair
value of a convertible instrument granted as part of a
share-based payment transaction to a nonemployee in exchange
for goods or services or as consideration payable to a
customer that is equity in form or, if debt in form, that
can be converted into equity instruments of the issuer, the
entity shall first apply Topic 718 on stock compensation.
ASC 718-10
35-9A A convertible instrument
award granted to a nonemployee in exchange for goods or
services to be used or consumed in a grantor’s own
operations is subject to recognition and measurement
guidance in this Topic until the award is fully vested. Once
vested, a convertible instrument award that is equity in
form, or debt in form, that can be converted into equity
instruments of the grantor, shall follow recognition and
measurement through reference to other applicable generally
accepted accounting principles (GAAP), including Subtopic
470-20 on debt with conversion and other options.
ASC 718 generally aligns the issuer’s accounting for share-based
payments granted to employees and nonemployees, including the classification of
employee and nonemployee awards. Accordingly, such awards generally remain within
the scope of ASC 718 throughout their lives provided that they are not modified
after they are issued to grantees. However, ASC 718-10-35-9A provides an exception
that specifies that convertible debt instruments granted to nonemployees in a
share-based payment transaction become subject to other GAAP for financial
instruments once vesting has occurred.
After the vesting of convertible debt instruments that were
originally granted or issued to nonemployees for goods or services, or as
consideration payable to a customer, such instruments become subject to the guidance
in ASC 470-20 that applies to CCFs and to the evaluation of BCFs in convertible debt
instruments that are not subject to the CCF guidance unless the embedded conversion
option is bifurcated as an embedded derivative under ASC 815-15 (see Section 2.3). ASC 470-20
contains special guidance on the recognition and measurement of BCFs for convertible
debt instruments that became subject to other GAAP for financial instruments (see
Section 7.3.5). Any
interest that is paid or payable on such instruments is treated as a cost of the
underlying goods or services received or receivable (rather than a financing cost)
until the instruments are considered issued for accounting purposes. Under ASC
505-50-S99-1, “if the issuer receives a right to receive future services in exchange
for unvested, forfeitable equity instruments, those equity instruments should be
treated as unissued for accounting purposes until the future services are received
(that is, the instruments are not considered issued until they vest).” By analogy to
this guidance, convertible debt instruments granted to nonemployees in exchange for
goods and services should be treated as unissued for accounting purposes until those
goods or services have been received.
ASC 470-20-30-23 through 30-26 contain guidance on the treatment of
proceeds in the measurement of any initial BCF in convertible debt instruments
issued to nonemployees for goods and services. Although discussed in the context of
BCF accounting, that guidance also addresses the initial fair value measurement of
the convertible debt instruments, which may be relevant once the instruments become
subject to other GAAP for financial instruments, including ASC 470-20 (see further
discussion in Section 7.3.5).
See Deloitte’s Roadmap Share-Based Payment Awards for further
information about the accounting for convertible debt instruments issued as
share-based payments.