2.5 Convertible Preferred Shares With CCFs (Before the Adoption of ASU 2020-06)
ASC 470-20
15-4 The guidance in this Section shall be considered after consideration of the guidance in Subtopic 815-15 on bifurcation of embedded derivatives, as applicable (see paragraph 815-15-55-76A). The guidance in the Cash Conversion Subsections applies only to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative instrument under Subtopic 815-15. The guidance in the Cash Conversion Subsections does not affect an issuer’s determination under Subtopic 815-15 of whether an embedded feature shall be separately accounted for as a derivative instrument.
Pending Content (Transition Guidance: ASC
815-40-65-1)
15-4
Paragraph superseded by Accounting Standards
Update No. 2020-06.
15-6 For purposes of determining whether an instrument is within the scope of the Cash Conversion Subsections, a convertible preferred share shall be considered a convertible debt instrument if it has both of the following characteristics:
- It is a mandatorily redeemable financial instrument.
- It is classified as a liability under Subtopic 480-10.
For related implementation guidance, see paragraph 470-20-55-70.
Pending Content (Transition Guidance: ASC
815-40-65-1)
15-6
Paragraph superseded by Accounting Standards
Update No. 2020-06.
55-70 An
example of a convertible preferred share that paragraph
470-20-15-6 requires an entity consider as a convertible
debt instrument for purposes of the scope application of the
Cash Conversion Subsections is a convertible preferred share
that has a stated redemption date and also would require the
issuer to settle the face amount of the instrument in cash
upon exercise of the conversion option. Such a convertible
preferred share is a mandatorily redeemable financial
instrument and is classified as a liability under Subtopic
480-10 because it embodies an unconditional obligation to
redeem the instrument by transferring assets at a specified
or determinable date (or dates).
Pending Content (Transition Guidance: ASC
815-40-65-1)
55-70
Paragraph superseded by Accounting Standards
Update No. 2020-06.
Before the adoption of ASU 2020-06, an instrument that is within the scope of
ASC 480-10 because it meets the definition of a mandatorily redeemable financial
instrument in ASC 480-10-20 (see Chapter 4) may be subject also to the cash conversion guidance in
ASC 470-20. For example, the terms of a redeemable convertible preferred share with
a stated redemption date might state that, upon conversion of the instrument by the
holder, the issuer must settle the face value of the instrument in cash but may
choose to settle the conversion spread in either shares or cash. Such an issuer
should consider whether it is required to separate the instrument into liability and
equity components in accordance with the cash conversion guidance in ASC 470-20 (see
Sections 4.2.4 and
4.3.1.4).
The CCF guidance in ASC 470-20 applies to the issuer’s accounting for convertible preferred stock that meets all of the following four conditions:
- Upon conversion, it may be settled either fully or partially in cash or other assets in accordance with its stated terms.
- It meets the definition of a mandatorily redeemable financial instrument in ASC 480-10 (see Section 4.1.1).
- It is classified as a liability under ASC 480-10 (i.e., it is a mandatorily redeemable financial instrument that is not exempt from the scope of ASC 480-10; see Section 4.1.5).
- The CCF is not required to be separately accounted for as a derivative instrument under ASC 815-15 (see Section 2.3 of Deloitte’s Roadmap Convertible Debt (Before Adoption of ASU 2020-06)).
In the application of the CCF guidance in ASC 470-20, such convertible preferred stock is treated as convertible debt.
Changing Lanes
ASU 2020-06 removes the separation
model in ASC 470-20 for certain convertible instruments with a CCF.
Therefore, the above guidance on application of the CCF accounting model
does not apply to entities that have adopted ASU 2020-06. However, the ASU
does not affect whether convertible preferred shares are within the scope of
ASC 480-10-15-4. Further, convertible preferred shares that are classified
as liabilities under ASC 480-10-25-4 are subject to the requirements for
convertible debt in ASC 470-20, such as the disclosure requirements in ASC
470-20-50 (see ASC 470-20-15-2D). See Chapter 1 for additional details about
ASU 2020-06.