3.3 Identifying and Evaluating Contractual Terms
When determining the appropriate accounting for a convertible debt instrument, an entity should devote adequate time to reading the underlying legal documents. Terms that could be significant to the accounting analysis may be buried deep within a contract’s fine print. To properly apply the appropriate accounting requirements, the entity needs to evaluate all the contractual terms, the legal and regulatory framework, and the relevant facts and circumstances.
In forming a view on the appropriate accounting, an entity cannot necessarily rely on the name given to
the transaction or how it is described in summary term sheets, slideshow presentations, and marketing
materials. Products with similar economics sometimes go by different names in the marketplace (e.g.,
products marketed by different banks), while products subject to different accounting may go by the
same or similar names (e.g., the applicability of the CCF guidance in ASC 470-20 to a convertible debt
instrument with a CCF depends on whether the equity conversion feature must be separated as an
embedded derivative under ASC 815-15). Furthermore, the names given to contractual provisions
in legal documents (e.g., conversion, exchange, share settlement, or redemption provisions) do not
necessarily reflect their economics or how they would be identified and analyzed for accounting
purposes (see, e.g., Sections 2.3 and 2.4 and Appendix A). Minor variations in the way contractual terms
are defined can have major accounting implications.