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Chapter 5 — Convertible Debt Issued at a Substantial Premium

5.3 Initial Recognition

5.3 Initial Recognition

When initially recognizing convertible debt to which the guidance in ASC 470-20-25-13 on substantial premiums applies, the issuer allocates the initial amount attributable to the debt (see Section 3.5.2) between the instrument’s debt and equity components. The face amount is recognized as debt, and the premium is recognized in APIC. The issuer should also determine whether the instrument contains any embedded features that must be bifurcated as derivatives under ASC 815-15-25-1 (e.g., a put, call, redemption, or indexation feature). While the issuer should reduce the initial carrying amount of the convertible debt by any direct or incremental issuance costs paid to third parties associated with the debt’s issuance, the guidance in U.S. GAAP does not explicitly address whether or, if so, how to allocate such costs between an instrument’s debt and equity components (see Section 3.5.3).