5.2 Scope
ASC 470-20
25-13 It is not practicable in paragraph 470-20-25-11 to discuss all possible types of debt instruments with conversion features, debt instruments issued with stock purchase warrants, or debt instruments with a combination of such features. Instruments not explicitly discussed in that paragraph shall be dealt with in accordance with the substance of the transaction. For example, if a convertible debt instrument is issued at a substantial premium, there is a presumption that such premium represents paid-in capital.
Sometimes, convertible debt is sold or initially recognized at a substantial premium over the principal amount to be repaid at maturity. In this circumstance, the prohibition in ASC 470-20-25-12 against allocating part of the proceeds to equity does not apply. Instead, there is a presumption that the premium should be recognized in equity as paid-in capital if it is substantial.
Because ASC 470-20-25-13 only applies to convertible debt instruments that are not specifically addressed in other GAAP, the guidance is inapplicable to:
- Convertible debt instruments with a conversion feature that must be bifurcated as a derivative under ASC 815-15 (see Section 2.3 and Appendix A).
- Convertible debt instruments that have a separated equity component under the CCF or BCF guidance in ASC 470-20 (see Chapters 6 and 7).
The guidance on allocating a substantial premium to paid-in capital may apply in circumstances such as the following:
- An acquirer assumes an acquiree’s outstanding convertible debt in a business combination.
- Convertible debt is issued upon the exercise of a physically settled liability-classified warrant (see Section 7.3.4).
Although ASC 470-20 does not define substantial, a premium of 10 percent is
considered substantial (e.g., by analogy to ASC 470-50-40-10). In certain
circumstances, a premium of less than 10 percent may also be considered substantial
(e.g., for a zero-coupon convertible debt instrument that is initially recognized at
a premium, because of the value of the conversion feature, and for which negative
interest expense would be reported if the premium was not allocated to equity).
While ASC 470-20 does not address the circumstances in which an issuer may
overcome the presumption that a substantial premium should be recorded in paid-in
capital, the presumption may be overcome if the premium is not attributable to the
value of the equity conversion feature. Examples of such circumstances include:
-
The convertible debt was issued or assumed at a premium because it pays a higher coupon rate than that on similar nonconvertible debt.
-
The convertible debt includes an embedded feature other than the conversion feature that significantly increased the proceeds received for the debt.