9.4 Derecognition
9.4.1 Conversions in Accordance With an Instrument’s Original Terms
Under U.S. GAAP, an issuer’s accounting for the conversion of a convertible debt instrument into equity shares in accordance with the instrument’s original terms depends on the particular circumstances:
- Conversion of a traditional convertible debt instrument that was not separated into liability and equity components under ASC 470-20 — The net carrying amount of the debt is credited to equity to reflect the stock issued; no gain or loss is recognized (see Section 4.5.2) unless (1) the conversion occurred upon the issuer’s exercise of a call option and (2) the conversion option was not substantive at issuance. If the debt became convertible upon the issuer’s exercise of a call option and did not otherwise contain a substantive conversion feature as of its issuance date, debt extinguishment accounting applies (see Section 4.5.3).
- Conversion of a convertible debt instrument that was separated into its liability and equity components in accordance with the CCF guidance in ASC 470-20 — A portion of the fair value of the consideration transferred upon conversion is allocated to the extinguishment of the liability component on the basis of the component’s conversion-date fair value (see Section 6.5). Any difference between this amount and the net carrying amount of the extinguished liability component is recognized currently in income.
- Conversion of a convertible debt instrument that includes a separately presented BCF under ASC 470-20 — All of the unamortized discount remaining on the conversion date is recognized immediately as interest expense as of that date (see Section 7.6.1).
- Conversion of a convertible debt instrument that includes a separate equity component for reasons other than a CCF or BCF — All of the unamortized discount remaining on the conversion date is recognized immediately as interest expense as of that date (see Section 4.5.2.2).
Under IFRS Accounting Standards, as indicated in paragraph AG32 of IAS 32, upon
the “conversion of a convertible instrument at maturity, the entity derecognises
the liability component and recognises it as equity. The original equity
component remains as equity (although it may be transferred from one line item
within equity to another). There is no gain or loss on conversion at maturity.”
(Under both U.S. GAAP and IFRS Accounting Standards, entities must recognize
upon an induced conversion a loss that is equal to the difference between the
fair value of the consideration transferred under the revised terms and the fair
value of the consideration issuable under the original terms; see Section 4.5.4.)
9.4.2 Extinguishments
Under U.S. GAAP, if an issuer redeems or repurchases traditional convertible debt, it recognizes an extinguishment gain or loss that is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt (see Section 4.5.5). If the convertible debt is separated into liability and equity components under the CCF guidance in ASC 470-20, the reacquisition price of the extinguished debt is allocated between the liability and equity components on the basis of the extinguishment-date fair value of the liability component (see Section 6.5). If the convertible debt contains a separated BCF, a portion of the reacquisition price equal to the conversion feature’s extinguishment-date intrinsic value is allocated to equity and the remaining amount is allocated to the extinguishment of the debt (see Section 7.6.2). For instruments that are within the scope of the CCF or BCF guidance in ASC 470-20, any difference between the portion of the reacquisition price allocated to the liability component and its net carrying amount is recognized currently in income as an extinguishment gain or loss.
Under IFRS Accounting Standards, in accordance with paragraph AG33 of IAS 32, if
an entity redeems or repurchases a convertible instrument before its maturity
(without altering the conversion feature), the consideration paid (including any
transaction costs) is allocated to the liability and equity components as of the
date of the early redemption or repurchase on the basis of the
extinguishment-date fair value of the liability component. The entity records a
gain or loss in the income statement for any difference between the amount of
the consideration allocated to the liability component and the liability
component’s carrying amount at that time. The amount of consideration allocated
to the equity component is recorded in equity, with no gain or loss recorded.