Chapter 1 — Overview | DART – Deloitte Accounting Research Tool

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ASC 480-10

05-1 The Codification contains separate Topics for liabilities and equity, including a separate Topic for debt. The Distinguishing Liabilities from Equity Topic contains only the Overall Subtopic. This Subtopic establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. Section 480-10-25 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer.

ASC 480 provides guidance on determining whether (1) certain financial instruments with both debt-like and equity-like characteristics should be accounted for “outside of equity” (i.e., as liabilities or, in some cases, assets) by the issuer and (2) SEC registrants should present certain redeemable equity instruments as temporary equity.

Examples of contracts and transactions that may require evaluation under ASC 480 include:

Redeemable shares.
Redeemable noncontrolling interests.
Forward contracts to repurchase own shares.
Forward contracts to sell redeemable shares.
Written put options on own stock.
Warrants (and written call options) on redeemable equity shares.
Warrants on shares with deemed liquidation provisions.
Puttable warrants on own stock.
Equity collars.
Share-settled debt (this term is used in this Roadmap to describe a share-settled obligation that is not in the legal form of debt but has the same economic payoff profile as debt).
Preferred shares that are mandatorily convertible into a variable number of common shares.
Unsettled treasury stock transactions.
Accelerated share repurchase programs.
Hybrid equity units.

However, ASC 480 does not apply to legal-form debt, which is always classified as a liability by the issuer (see Section 2.2.4).

ASC 480 requires an issuer to classify three classes of financial instruments (e.g., outstanding shares and contracts on the issuer’s shares) as assets or liabilities:

Mandatorily redeemable financial instruments (see Chapter 4) — The issuer of a financial instrument that is in the form of a share must classify the share as a liability if it embodies an unconditional obligation requiring the issuer to redeem the share by transferring assets unless redemption would occur only upon the liquidation or termination of the reporting entity. Examples include those mandatorily redeemable shares and mandatorily redeemable noncontrolling interests that do not contain any substantive conversion features.
Obligations to repurchase the entity’s equity shares by transferring assets (see Chapter 5) — A financial instrument other than an outstanding share is classified as an asset or a liability if it both (1) embodies an obligation to repurchase the issuer’s equity shares (or is indexed to such an obligation) and (2) requires (or may require) the issuer to settle the obligation by transferring assets. Examples include those forward purchase contracts and written put options on the entity’s own equity shares that are either physically settled or net cash settled.
Certain obligations to issue a variable number of equity shares (see Chapter 6) — An outstanding share that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies an obligation, is classified as an asset or a liability if the issuer must or may settle the obligation by issuing a variable number of its equity shares and the obligation’s monetary value is based solely or predominantly on one of the following: (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuer’s equity shares, or (3) variations inversely related to changes in the fair value of the issuer’s equity shares. Examples include share-settled debt and those forward purchase contracts and written put options on the entity’s own equity shares that are net share settled.

Financial instruments that are accounted for as assets or liabilities under ASC 480 are initially recognized at fair value, with one exception (see Sections 4.3, 5.3, and 6.3). A forward contract that requires the entity to repurchase a fixed number of its equity shares for cash is initially measured at the fair value of the shares at inception (i.e., not the fair value of the forward contract), with certain adjustments, and the offsetting entry is presented in equity (i.e., the transaction is treated as if the repurchase had already occurred with borrowed funds).

In subsequent periods, financial instruments classified as assets or liabilities under ASC 480 are remeasured at their then-current fair value, and changes in fair value are recorded in earnings, with certain exceptions (see Sections 4.3, 5.3, and 6.3). In accordance with ASC 480-10-35-3, physically settled forward contracts to repurchase “a fixed number of the issuer’s equity shares [for] cash and mandatorily redeemable financial instruments [are] measured subsequently in either of the following ways,” as applicable:

“If both the amount to be paid and the settlement date are fixed, those instruments shall be measured subsequently at the present value of the amount to be paid at settlement, accruing interest cost using the rate implicit at inception.”
“If either the amount to be paid or the settlement date varies based on specified conditions, those instruments shall be measured subsequently at the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date, recognizing the resulting change in that amount from the previous reporting date as interest cost.”

Further, ASC 480 includes:

Special guidance on the accounting for certain option combinations involving noncontrolling interests and illustrations of the application of its requirements to other option combinations (see Chapter 7).
Presentation and disclosure requirements (see Chapter 8).

If ASC 480 does not require an instrument to be classified outside of equity, an issuer should consider whether such a requirement exists under other GAAP (e.g., ASC 815-40) or whether the SEC guidance in ASC 480-10-S99-3A requires the instrument to be classified outside of permanent equity. Under the SEC’s guidance in ASC 480-10-S99-3A, issuers of certain equity-classified instruments that are redeemable for cash or other assets in circumstances not under the sole control of the issuer must present such instruments in temporary equity and apply specific measurement and disclosure guidance to them (see Chapter 9).

The accounting for certain transactions involving equity instruments, including distributions on equity shares and the accounting for treasury stock transactions, is addressed in ASC 505. ASC 260 addresses the accounting implications for certain modifications and extinguishments of equity instruments. The accounting for other transactions involving financial instruments classified in equity is addressed by either practice that has developed over time or guidance provided by the SEC. See Chapter 10 for more information.

Some entities are affected by both U.S. GAAP and IFRS® Accounting Standards. There are significant differences between the guidance in ASC 480 and the equivalent guidance under IFRS Accounting Standards (see Chapter 11).

The appendixes of this Roadmap include an overview of the classification and measurement requirements in ASC 480 (Appendix A), a table with sources of SEC guidance on temporary equity (Appendix B), and glossary terms from ASC 480-10-20 and the ASC master glossary (Appendix C).

As part of the FASB’s codification in 2009 of U.S. GAAP (the “Codification”), the guidance in FASB Statement 150, EITF Issue 00-4, and EITF Topic D-98 was incorporated into ASC 480. This Roadmap contains excerpts from the Background Information and Basis for Conclusions of Statement 150 that describe the Board’s considerations in developing some of the guidance now contained in that topic.

The following ASUs have amended the guidance in ASC 480:

ASU 2009-04 (issued in August 2009) updated the SEC’s guidance on the accounting for redeemable equity instruments in ASC 480-10-S99-3A (see Chapter 9).
ASU 2016-19 (issued in December 2016) introduced a scope exception for registration payment arrangements (see Section 2.7).
ASU 2017-11 (issued in July 2017) recharacterized certain indefinite effective-date deferrals as scope exceptions to improve the readability of the guidance in ASC 480 (see Sections 2.1.2 and 4.1.5).
ASU 2018-07 (issued in June 2018) amended the ASC 480 scope exception for obligations under share-based payment arrangements (see Section 2.4). ASU 2018-07 was subsequently amended by ASU 2019-08 to include, within the scope of ASC 718, share-based payment awards to customers.)
ASU 2018-09 (issued in July 2018) conformed the guidance on certain freestanding options involving noncontrolling interests in ASC 480-10-55 with the guidance in FASB Statement 150 and ASC 480-10-25-15 (see Section 7.1.2).
ASU 2020-06 (issued in August 2020) amended ASC 260-10, ASC 470-20, and ASC 815-40 and significantly affects an issuer’s accounting for convertible instruments as well as contracts on an entity’s own equity and related EPS calculations. While these amendments did not substantially alter an entity’s application of ASC 480, the Roadmap reflects any changes that resulted from them.

It is assumed in this Roadmap that an entity has adopted all of these ASUs.

Connecting the Dots

In addition to ASC 480, entities typically must consider other U.S. GAAP guidance when analyzing financial instruments with characteristics of both liabilities and equity, including:

ASC 260-10 (see Deloitte’s Roadmap Earnings per Share).
ASC 470-20 (see Chapter 7 of Deloitte’s Roadmap Issuer’s Accounting for Debt).
ASC 815-10 and ASC 815-15 (see Chapter 8 of Deloitte’s Roadmap Issuer's Accounting for Debt).
ASC 815-40 (see Deloitte’s Roadmap Contracts on an Entity’s Own Equity).

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.