8.4 Subsequent Accounting
ASC 470-20
35-11A If it becomes probable
that the counterparty to a share-lending arrangement will
default, the issuer of the share-lending arrangement shall
recognize an expense equal to the then fair value of the
unreturned shares, net of the fair value of probable
recoveries, with an offset to additional paid-in capital.
The issuer of the share-lending arrangement shall remeasure
the fair value of the unreturned shares each reporting
period through earnings until the arrangement consideration
payable by the counterparty becomes fixed. Subsequent
changes in the amount of the probable recoveries should also
be recognized in earnings.
Unless an issuer elects to account for debt arising from an own-share lending arrangement at fair value under the fair value option in ASC 825-10 (see Section 2.5), it uses the effective interest method to amortize any debt discount (or reduced premium) that is created by recognizing the arrangement. The amount recognized in equity is not remeasured as long as (1) the share-lending arrangement qualifies as equity under ASC 815-40 and (2) it is not probable that the counterparty to the share-lending arrangement will default in returning the loaned shares (or an equivalent amount of consideration).
If it becomes probable that the counterparty to the share-lending arrangement will default in returning the loaned shares (or an equivalent amount of consideration), the issuer must recognize an expense equal to the fair value of the unreturned shares adjusted for the fair value of any probable recoveries. The offsetting entry for the expense is to APIC (i.e., Dr: Loss; Cr: Equity — APIC). The EITF stated the following related to Issue 09-1 at its June 18, 2009, meeting:
Some Task Force members observed that equity-classified instruments do not generally result in expense charges. However, the Task Force concluded that an expense was appropriate in this situation because it relates to a counterparty default and not changes in the entity’s share price.
In other words, the EITF determined that even though the share-lending arrangement is classified in equity, it is appropriate to record an expense because the issuer incurs a loss from the counterparty’s failure to satisfy its obligation to return the loaned shares. Under the contractual terms of the instrument, the issuer should have received the shares back (or an equivalent amount of consideration), but instead it received no value or something of lesser value because of the counterparty’s default.
The amount of the loss (i.e., the fair value of the unreturned shares adjusted for probable recoveries) is remeasured each period (e.g., for changes in the fair value of the unreturned shares) until the consideration payable becomes fixed. The issuer recognizes changes in the amount of the loss in earnings with an offset to APIC.