Chapter 4 — Mandatorily Redeemable Financial Instruments

4.1 Classification

4.1.1 Overview

ASC 480-10

25-4 A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

25-6 In determining if an instrument is mandatorily redeemable, all terms within a redeemable instrument shall be considered. The following items do not affect the classification of a mandatorily redeemable financial instrument as a liability:

A term extension option
A provision that defers redemption until a specified liquidity level is reached
A similar provision that may delay or accelerate the timing of a mandatory redemption.

25-7 If a financial instrument will be redeemed only upon the occurrence of a conditional event, redemption of that instrument is conditional and, therefore, the instrument does not meet the definition of mandatorily redeemable financial instrument in this Subtopic. . . .

55-3 Various financial instruments issued in the form of shares embody unconditional obligations of the issuer to redeem the instruments by transferring its assets at a specified or determinable date or dates or upon an event that is certain to occur.

55-4 This Section presents two examples of mandatorily redeemable financial instruments:

Certain forms of trust-preferred securities (those that are required to be redeemed at specified or determinable dates)
Stock that must be redeemed upon the death or termination of the individual who holds it, which is an event that is certain to occur.

55-5 Although some mandatorily redeemable instruments are issued in the form of shares, those instruments are classified as liabilities under this Subtopic because of the embodied obligation on the part of the issuer to transfer its assets.

To meet ASC 480’s definition of a mandatorily redeemable financial instrument, the instrument must have all of the following characteristics:

Its legal form must be a share (see Section 4.1.2).
It must embody an unconditional obligation of the issuer to redeem the instrument at a specified or determinable date (or dates) or upon an event that is certain to occur (i.e., redemption is certain to occur in the absence of a breach of the instrument’s contractual terms — see Section 4.1.3).
The issuer must be required to satisfy the obligation by transferring its assets (see Section 4.1.4).

There are several exceptions in ASC 480 to the requirement to classify instruments that meet the definition of a mandatorily redeemable financial instrument as liabilities. See the discussion in Section 4.1.5.

4.1.2 Legal Form of a Share

The term “mandatorily redeemable financial instrument” is limited to financial instruments “in the form of shares.” In this context, shares include not just equity securities (including both common and preferred stock). Rather, the term applies broadly to ownership interests in various forms, including shares of stock not in the form of securities, partnership interests (including general partnership interests and limited partnership interests), membership interests (or units) in limited liability companies or cooperative entities, and policyholder interests in mutual insurance companies. However, financial instruments in the legal form of debt are outside the scope of ASC 480 (see Section 2.2.4).

The following table lists examples of instruments that, unless a legal analysis of their form suggests otherwise, would and would not be considered shares under ASC 480:

Share	Not a Share
Common shares of stock Preferred shares of stock Partnership interests Membership interests (or units) in limited liability companies Membership interests in cooperative entities Policyholder interests in mutual insurance companies	Debt securities Convertible debt securities Debentures Notes payable

4.1.3 Unconditional Redemption Obligation

To meet the definition of a mandatorily redeemable financial instrument, the instrument must embody an unconditional redemption obligation. An obligation involves a duty or responsibility to perform (see Section 2.2.1). A redemption obligation is unconditional if redemption is certain to occur in the absence of a violation of the contractual terms. Neither the issuer nor the holder can have the unilateral discretion to avoid redemption except by both parties’ consent (i.e., they mutually agree to modify the terms). Accordingly, a share that is redeemable at the option of either the issuer or the holder, or whose redemption is contingent upon the occurrence or nonoccurrence of an uncertain future event, does not meet the definition of a mandatorily redeemable financial instrument before the option is exercised or the event occurs, because such an obligation is conditional. Likewise, a share that could be redeemed at the option of the holder or upon the occurrence of a contingent event that is outside the control of the issuer or holder does not meet the definition of a mandatorily redeemable financial instrument.

As discussed in Section 6.2.6, an outstanding share that embodies an unconditional obligation should be evaluated as a variable-share obligation under ASC 480-10-25-14 rather than as a mandatorily redeemable financial instrument under ASC 480-10-25-4 if the issuer has a choice of settling the obligation by either transferring assets or delivering a variable number of nonredeemable shares of equal value.

If an instrument with a mandatory redemption date contains contractual features that have the effect of making redemption conditional, the instrument would not meet the definition of a mandatorily redeemable financial instrument in ASC 480-10-20 because redemption is not certain to occur.

Example 4-1

Mandatorily Redeemable Convertible Shares

An equity share with a fixed redemption date includes an embedded option that permits the holder to convert the entire instrument into a fixed number of equity shares before the stated redemption date. The conversion feature is substantive. Because the holder may elect to convert the instrument into equity shares rather than hold it until redemption, redemption is conditional on the holder’s not converting.

Accordingly, a fixed-term instrument that is convertible into the issuer’s shares of stock would not meet the definition of a mandatorily redeemable financial instrument in ASC 480-10-20 unless (1) the conversion option has expired, (2) the conversion option is nonsubstantive (see Section 3.2), (3) the shares that would be delivered upon conversion contain an unconditional redemption obligation, or (4) the issuer is required to settle all or part of the instrument in cash or other assets upon conversion (e.g., it must settle the stated amount, or par, in cash).

In evaluating whether an instrument meets the definition of a mandatorily redeemable financial instrument, the issuer does not consider redemption obligations accounted for as freestanding instruments that are separate from the instrument being evaluated. For example, a perpetual share that is issued along with a forward contract that requires the issuer to repurchase a similar share for cash on a specified date would not be viewed as embodying a redemption obligation as long as the contracts are two separate freestanding financial instruments (see Section 3.3).

A redemption obligation does not have to be for a fixed amount to qualify as unconditional. For example, the amount of the redemption obligation might be for the current fair value of the share or a participating interest in the issuer’s net assets, or it may vary on the basis of a specified underlying (e.g., the S&P 500). Further, the timing of redemption does not have to be fixed if redemption is certain to occur at some point (e.g., upon an event that is certain to occur at an unknown time).

In determining whether a redemption obligation is unconditional, an entity does not consider the likelihood of redemption (although the likelihood that a term will be triggered might affect an evaluation of whether the term is substantive; see Section 3.2). For example, a high probability that the issuer will be unable to satisfy a contractually unconditional redemption obligation (e.g., because of a lack of funds) does not make that obligation conditional. Conversely, a high probability that an instrument will be redeemed (e.g., because of an economic incentive to redeem the instrument) does not make a conditional redemption obligation unconditional (see Section 2.2.1).

The following table contains examples of terms and conditions that would be considered unconditional redemption obligations and those that would not:

Unconditional Redemption Obligations	Not Unconditional Redemption Obligations
Redemption is required on a fixed or determinable date (e.g., five years from the issuance date). Redemption may be deferred under a term extension option, but not indefinitely. For example, either the issuer or the holder might have an option to extend the term for a finite period. Alternatively, redemption may be automatically deferred for a finite period upon the occurrence or nonoccurrence of an event. Redemption is required on a fixed or determinable date but may be accelerated upon an event that is not certain to occur (e.g., a call, prepayment, put, or other early-settlement provision). Redemption is required upon an event that is certain to occur, for example: The holder’s death (ASC 480-10-55-4(b)). The holder’s retirement, termination, or attainment of a certain age, whichever occurs first. Redemption is required unless a specified liquidity level is not reached (ASC 480-10-25-6). If funds are not available, the shares get redeemed once those funds are available. Redemption is required unless redemption would be illegal because of a lack of legally available funds. (If funds are not available, the shares get redeemed once those funds are available.) Redemption is required unless payment would cause the issuer to become insolvent. Redemption is required unless a nonsubstantive conversion option is exercised. Redemption is unconditional because a substantive conversion option has expired. Redemption is required unless a nonsubstantive condition is met. Redemption is required because the issuer has issued an irrevocable notice to redeem the instrument (e.g., a callable preferred share).	Redemption is required at the option of the holder (e.g., through an embedded put option). Although the issuer cannot control whether the holder will elect to redeem, the instrument is not a liability under ASC 480 because of the uncertainty related to whether the holder will elect redemption (i.e., redemption is conditional on the holder’s election to redeem). Redemption is required at the option of the issuer (e.g., through an embedded call option). Redemption is highly probable because of an embedded put-call option combination with the same strike prices (ASC 480-10-55-40). Redemption may be deferred indefinitely. Redemption is required upon an event that is not certain to occur, for example: An IPO. A change in control of the issuer (e.g., a merger or consolidation in which at least 50 percent of the entity’s voting power is transferred; see ASC 480-10-55-10). The issuer’s failure to meet specified financial covenants. Attainment of a specified revenue target. A reduction in the issuer’s credit rating. Sale of substantially all of the entity’s assets. Liquidation, dissolution, or winding up of the entity. Issuance of shares of common stock, preferred stock, or other capital stock in exchange for cash. A vote by 50 percent of the holders of preferred stock. The decision by a third party not to purchase the instrument. Redemption is required at the option of the holder upon an event that is certain to occur (e.g., death). Redemption is required upon an event that is certain to occur (e.g., the holder’s death) if other terms in the instrument could cause the redemption obligation to expire before the occurrence of the event (e.g., the holder’s termination of employment). Redemption is required unless a substantive conversion option is exercised. Redemption is required unless a material adverse change occurs. The issuer has a past practice of redeeming similar instruments. There is a high likelihood of redemption (e.g., because of economic compulsion).

Unconditional Redemption Obligations

Not Unconditional Redemption Obligations

Redemption is required on a fixed or determinable date (e.g., five years from the issuance date).
Redemption may be deferred under a term extension option, but not indefinitely. For example, either the issuer or the holder might have an option to extend the term for a finite period. Alternatively, redemption may be automatically deferred for a finite period upon the occurrence or nonoccurrence of an event.
Redemption is required on a fixed or determinable date but may be accelerated upon an event that is not certain to occur (e.g., a call, prepayment, put, or other early-settlement provision).
Redemption is required upon an event that is certain to occur, for example:
- The holder’s death (ASC 480-10-55-4(b)).
- The holder’s retirement, termination, or attainment of a certain age, whichever occurs first.
Redemption is required unless a specified liquidity level is not reached (ASC 480-10-25-6). If funds are not available, the shares get redeemed once those funds are available.
Redemption is required unless redemption would be illegal because of a lack of legally available funds. (If funds are not available, the shares get redeemed once those funds are available.)
Redemption is required unless payment would cause the issuer to become insolvent.
Redemption is required unless a nonsubstantive conversion option is exercised.
Redemption is unconditional because a substantive conversion option has expired.
Redemption is required unless a nonsubstantive condition is met.
Redemption is required because the issuer has issued an irrevocable notice to redeem the instrument (e.g., a callable preferred share).

Redemption is required at the option of the holder (e.g., through an embedded put option). Although the issuer cannot control whether the holder will elect to redeem, the instrument is not a liability under ASC 480 because of the uncertainty related to whether the holder will elect redemption (i.e., redemption is conditional on the holder’s election to redeem).
Redemption is required at the option of the issuer (e.g., through an embedded call option).
Redemption is highly probable because of an embedded put-call option combination with the same strike prices (ASC 480-10-55-40).
Redemption may be deferred indefinitely.
Redemption is required upon an event that is not certain to occur, for example:
- An IPO.
- A change in control of the issuer (e.g., a merger or consolidation in which at least 50 percent of the entity’s voting power is transferred; see ASC 480-10-55-10).
- The issuer’s failure to meet specified financial covenants.
- Attainment of a specified revenue target.
- A reduction in the issuer’s credit rating.
- Sale of substantially all of the entity’s assets.
- Liquidation, dissolution, or winding up of the entity.
- Issuance of shares of common stock, preferred stock, or other capital stock in exchange for cash.
- A vote by 50 percent of the holders of preferred stock.
- The decision by a third party not to purchase the instrument.
Redemption is required at the option of the holder upon an event that is certain to occur (e.g., death).
Redemption is required upon an event that is certain to occur (e.g., the holder’s death) if other terms in the instrument could cause the redemption obligation to expire before the occurrence of the event (e.g., the holder’s termination of employment).
Redemption is required unless a substantive conversion option is exercised.
Redemption is required unless a material adverse change occurs.
The issuer has a past practice of redeeming similar instruments.
There is a high likelihood of redemption (e.g., because of economic compulsion).

If the redemption obligation in an outstanding share is conditional, an issuer that applies SEC guidance should consider whether it must classify the instrument in temporary equity (see Chapter 9).

4.1.4 Transfer of Cash or Other Assets

As defined, mandatorily redeemable financial instruments are limited to instruments that the issuer must settle in its assets (e.g., cash or investments in debt or equity securities issued by third parties). An instrument that does not involve a future transfer of assets (e.g., a prepaid obligation) does not meet this definition. Further, an instrument that the issuer must settle by providing services (e.g., an obligation to repurchase shares in exchange for services) would not meet the definition and would be outside the scope of ASC 480 (see Section 2.2.2).

Although the issuer’s equity shares are assets of its shareholders, they are not the issuer’s assets. Accordingly, an instrument that the issuer must or may settle in its equity shares would not qualify as a mandatorily redeemable financial instrument. However, an entity should evaluate whether ASC 480-10-25-14 requires such an instrument to be classified outside of equity (see Chapter 6). For example, under that guidance, an issuer would classify as a liability a share that it must settle in a variable number of its equity shares worth a fixed monetary amount known at inception (e.g., a preferred share that is mandatorily convertible in a variable number of common shares worth a fixed monetary amount). A share that the issuer must “redeem” on a specified date by delivering a fixed number of the issuer’s equity shares would not meet the definition of a mandatorily redeemable financial instrument because the transfer of cash or other assets is not involved. Further, because the delivery of a variable number of shares is not involved, the issuer would not be required to classify the share as a liability under ASC 480-10-25-14.

Regardless of their classification in the subsidiary’s separate financial statements, shares issued by a parent and held by its subsidiary would be considered assets in the evaluation of whether ASC 480 applies in the subsidiary’s separate financial statements.

Example 4-2

Shares Issued by a Subsidiary That Are Mandatorily Convertible Into Parent Shares

Subsidiary S issues a preferred share that is mandatorily convertible into a fixed number of common shares issued by its parent on a specified date. In its separate financial statements, S would treat any held shares issued by Parent P as assets when applying ASC 480. Therefore, in S’s separate financial statements, the mandatorily convertible preferred shares may meet the definition of a mandatorily redeemable financial instrument. In P’s consolidated financial statements, however, common shares issued by P are not assets but are considered the issuer’s equity shares. Therefore, in P’s consolidated financial statements, the mandatorily convertible preferred share issued by S is outside the scope of ASC 480.

Although the guidance in ASC 480-10-S99-3A on temporary equity classification contains an exception for certain contracts for which redemption will be funded by an insurance policy (see Section 9.4.3), there is no similar exception from the liability classification guidance in ASC 480 for such contracts. An instrument that must be redeemed for cash or other assets upon the death of the holder must be classified as a liability even if the issuer has an insurance contract to cover the cost of redemption (see ASC 480-10-55-64).

The following table contains examples of obligations to transfer cash or other assets:

Future Transfer of Cash or Other Assets	Not a Future Transfer of Cash or Other Assets
An obligation to transfer a fixed or determinable amount of cash An obligation to transfer a fixed or determinable quantity of an asset (e.g., investments in debt or equity securities issued by third parties)	An obligation to transfer the issuer’s equity shares An obligation to transfer services An obligation that has been fully prepaid

4.1.5 Exceptions

4.1.5.1 Overview

There are several exceptions to the liability classification requirement for instruments that meet the definition of a mandatorily redeemable financial instrument. Those exceptions apply to:

Shares that are mandatorily redeemable only upon the liquidation or termination of the reporting entity (see Section 4.1.5.2).
Mandatorily redeemable noncontrolling interests that are redeemable only upon the liquidation or termination of the subsidiary (see Section 4.1.5.3). (For other mandatorily redeemable noncontrolling interests that were issued before November 5, 2003, the classification provisions in ASC 480 apply, but not the measurement provisions.)
Mandatorily redeemable financial instruments of nonpublic entities that are not SEC registrants unless they are mandatorily redeemable on fixed dates for amounts that are either fixed or are determined by reference to an external index (e.g., an interest rate index or currency index) (see Section 4.1.5.4).

The table below summarizes the various exceptions to the requirement to apply the guidance in ASC 480 to instruments that meet the definition of a mandatorily redeemable financial instrument:

Affected Entities	Affected Instruments	Guidance in ASC 480 That Does Not Apply	Guidance in ASC 480 That Applies
All entities	Shares that are mandatorily redeemable only upon the liquidation or termination of the reporting entity	Classification Disclosure Measurement	None
Parents preparing consolidated financial statements	Mandatorily redeemable noncontrolling interests that are redeemable only upon the liquidation or termination of the subsidiary	Classification Measurement	Disclosure
Parents preparing consolidated financial statements	Other mandatorily redeemable noncontrolling interests that were issued before November 5, 2003	Measurement	Classification Disclosure
Subsidiaries preparing stand-alone financial statements	Mandatorily redeemable noncontrolling interests that were issued before November 5, 2003	Measurement	Classification Disclosure
Nonpublic entities that are not SEC registrants	Mandatorily redeemable financial instruments other than those that are mandatorily redeemable on fixed dates for amounts that are either fixed or determined by reference to an interest rate index, currency index, or another external index	Classification Disclosure Measurement	None

If a mandatorily redeemable financial instrument qualifies for one of the exceptions in ASC 480, the issuer should consider the applicability of ASC 480-10-S99-3A to that instrument. That guidance requires SEC registrants to classify certain redeemable securities in temporary equity (see Chapter 9). In prepared remarks at the 2003 AICPA Conference on Current SEC Developments, then SEC Professional Accounting Fellow Gregory Faucette stated the following:

Entities with instruments that qualify for [the scope exceptions in ASC 480-10-15-7A through 15-15F] should refer to [ASC 480-10-S99-3A] for guidance related to classification and/or measurement, as applicable, for those securities that . . . will not be fully accounted for in accordance with [ASC 480]. In other words, if both the classification and measurement guidance in [ASC 480 is inapplicable] for an instrument, look to [ASC 480-10-S99-3A] for both classification and measurement guidance. If only the measurement guidance in [ASC 480 is inapplicable] for an instrument, look to [ASC 480-10-S99-3A] for continued measurement guidance.

4.1.5.2 Only-Upon-Liquidation Exception

ASC 480-10

25-4 A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

Certain entities such as partnerships, limited liability companies, or trusts that are set up for a specific project or purpose may have a finite life. Their governing documents (e.g., partnership agreement or articles of organization) may specify a date (e.g., December 31, 2199) on which they will be terminated and on which their assets will be liquidated, their liabilities will be settled, and any remaining cash will be distributed to holders of their equity interests. When such entities issue equity interests, redemption is certain to occur. Therefore, while those interests meet the definition in ASC 480-10-20 of a mandatorily redeemable financial instrument, they do not require classification as liabilities in accordance with ASC 480-10-25-4.

In consolidated financial statements, a similar exception applies to instruments that are mandatorily redeemable upon the liquidation or termination of a subsidiary. In accordance with ASC 480-10-15-7E, such instruments are not classified as liabilities under ASC 480 even if they meet the definition of a mandatorily redeemable financial instrument.

If a finite-life entity issues an instrument that is mandatorily redeemable either upon the scheduled liquidation or termination of the reporting entity or upon an event that is certain to occur (e.g., the holder’s death), the only-upon-liquidation exception to liability classification is available if the event that would trigger redemption is not certain to occur before the entity’s scheduled liquidation or termination. In such a scenario, the potential requirement to redeem before the entity’s liquidation or dissolution represents a conditional obligation because the event that triggers it is not certain to occur before the entity’s scheduled liquidation or dissolution. Even though the instrument is certain to be redeemed, it is possible that redemption will be required only upon the entity’s liquidation or dissolution, in which case the only-upon-liquidation exception is available.

4.1.5.3 Noncontrolling Interest Exception

ASC 480-10

15-7E The guidance in this Subtopic does not apply to mandatorily redeemable noncontrolling interests (of all entities, public and nonpublic) as follows:

The classification and measurement provisions of this Subtopic do not apply to mandatorily redeemable noncontrolling interests that would not have to be classified as liabilities by the subsidiary, under the only upon liquidation exception in paragraphs 480-10-25-4 and 480-10-25-6, but would be classified as liabilities by the parent in consolidated financial statements.
The measurement provisions of this Subtopic do not apply to other mandatorily redeemable noncontrolling interests that were issued before November 5, 2003, both for the parent in consolidated financial statements and for the subsidiary that issued the instruments that result in the mandatorily redeemable noncontrolling interest. For those instruments, the measurement guidance for redeemable shares and noncontrolling interests in other predecessor literature (for example, in paragraph 480-10-S99-3A) continues to apply.

15-7F All public entities as well as nonpublic entities that are SEC registrants with mandatorily redeemable noncontrolling interests subject to the classification and measurement scope exception in paragraph 480-10-15-7E are required to follow the disclosure requirements in paragraphs 480-10-50-1 through 50-3 as well as disclosures required by other applicable guidance.

In consolidated financial statements, instruments that are mandatorily redeemable only upon the liquidation or termination of a subsidiary (e.g., noncontrolling interests in limited-life subsidiaries) are not required to be classified as liabilities, even if they meet the definition of a mandatorily redeemable financial instrument. Further, such instruments are exempt from the measurement guidance in ASC 480, although its disclosure requirements apply. In evaluating whether the scope exception in ASC 480-10-15-7E applies to situations in which the subsidiary does not meet the definition of a business, an entity should carefully consider the substance of the arrangement. If the subsidiary is not a substantive entity, the scope exception does not apply. This conclusion is consistent with analogous guidance in ASC 815-40-15-5C (see Section 2.6.1 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity) as well as ASC 810-10-40-3A. For example, a subsidiary would not be considered a substantive entity if it was structured to circumvent the mandatorily redeemable guidance in ASC 480.

If a noncontrolling interest in an entity that does not have a limited life qualifies as a mandatorily redeemable financial instrument under ASC 480, the entity is subject to all of the requirements of ASC 480 unless the nonpublic entity exception applies or the interest is grandfathered. Under ASC 480-10-15-7E(b), mandatorily redeemable noncontrolling interests are grandfathered out of ASC 480’s measurement provisions if the interests were issued before November 5, 2003. This applies both in the parent’s consolidated financial statements and in the financial statements of the subsidiary that issued the instrument. The classification and disclosure provisions of ASC 480 apply to such instruments.

4.1.5.4 Exception for Certain Instruments of Certain Nonpublic Entities

ASC 480-10

15-7A The classification, measurement, and disclosure guidance in this Subtopic does not apply to mandatorily redeemable financial instruments that meet both of the following:

They are issued by nonpublic entities that are not Securities and Exchange Commission (SEC) registrants.
They are mandatorily redeemable, but not on fixed dates or not for amounts that either are fixed or are determined by reference to an interest rate index, currency index, or another external index.

15-7B Mandatorily redeemable financial instruments issued by an SEC registrant are not eligible for the scope exception in paragraph 480-10-15-7A, even if the entity meets the definition of a nonpublic entity.

15-7C Some entities have issued shares that are required to be redeemed under related agreements. If the shares are issued with a redemption agreement and the required redemption relates to those specific underlying shares, the shares are mandatorily redeemable. If an entity with such shares and redemption agreement is a nonpublic entity that is not an SEC registrant, those mandatorily redeemable shares meet the scope exception in paragraph 480-10-15-7A if they meet the conditions specified in that paragraph.

15-7D Although the disclosure requirements of this Subtopic do not apply for those mandatorily redeemable instruments of certain nonpublic companies that meet the scope exception in paragraph 480-10-15-7A, the requirements of Subtopic 505-10 still apply. In particular, paragraph 505-10-50-3 requires information about the pertinent rights and privileges of the various securities outstanding, which includes mandatory redemption requirements. Paragraph 505-10-50-11 also requires disclosure of the amount of redemption requirements for all issues of stock that are redeemable at fixed or determinable prices on fixed or determinable dates in each of the next five years.

For nonpublic entities that are not SEC registrants, ASC 480 does not apply to mandatorily redeemable financial instruments other than those that are mandatorily redeemable on fixed dates for amounts that either are fixed or are determined by reference to an interest rate index, currency index, or another external index. For example, if a nonpublic entity has outstanding shares that are mandatorily redeemable for cash upon the death of the holder, those shares would not be accounted for as liabilities under ASC 480, even if they meet the definition of a mandatorily redeemable financial instrument, because the redemption date is not fixed. Similarly, if the shares of a nonpublic entity are mandatorily redeemable at the appraised value or fair value of the holder’s interest in the net assets of the entity, those shares would not be classified as liabilities under ASC 480, because the redemption amount is neither fixed nor determined on the basis of an external index.

The following table illustrates whether ASC 480 does or does not apply to a mandatorily redeemable financial instrument issued by a nonpublic entity that is not an SEC registrant:

Redemption Terms	Fixed Date	Variable Date
Fixed amount	Yes	No
Amount determined by reference to an interest rate index, currency index, or another external index	Yes	No
Other variable amounts	No	No

ASC 480-10-15-7D notes that in accordance with ASC 505-10-50-3 and ASC 505-10-50-11, a nonpublic entity that is not an SEC registrant that has issued securities to which the exception applies is required to disclose (1) “information about the pertinent rights and privileges of the various securities outstanding, which includes mandatory redemption requirements” and (2) “the amount of redemption requirements for all issues of stock that are redeemable at fixed or determinable prices on fixed or determinable dates in each of the next five years.”

To be eligible for the exception in ASC 480-10-15-7A, the issuer must be a nonpublic entity that is not an SEC registrant. In the application of ASC 480, a nonpublic entity is an “entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities).” However, according to ASC 480-10-20, an entity is an SEC registrant if it has debt securities trading in a public market (or will issue such securities). Therefore, an entity that has issued either debt or equity securities trading in a public market, or is in the process of issuing such securities, is not eligible for the exception.

Broker-dealers that are required to file financial statements with the SEC are not eligible for the exception for nonpublic entities that are not SEC registrants, even if they do not issue publicly traded stock or debt. In prepared remarks at the 2003 AICPA Conference on Current SEC Developments, Mr. Faucette stated the following:

[S]ome broker-dealers have asserted that they should be eligible for the [exceptions] for mandatorily redeemable financial instruments of certain nonpublic entities . . . . However, certain nonpublic entities are defined as entities other than SEC registrants. The definition of an SEC registrant . . . includes entities that are required to file financial statements with the SEC. Thus, the definition of an SEC registrant includes any broker-dealer that is required to file financial statements with the SEC, even if they do not issue publicly-traded stock or debt. Therefore, we believe that any broker-dealer that files statements with the SEC is not eligible for the additional [exceptions].

If a nonpublic entity that is not an SEC registrant subsequently becomes an SEC registrant, the entity applies ASC 480 as if it were an SEC registrant for all periods presented. In such a scenario, the exception to some of the requirements in ASC 480 for nonpublic entities is not available for any period presented. The SEC staff communicated its view on this matter at the AICPA SEC Regulations Committee meeting on April 8, 2004, which is described in the highlights of that meeting:

An entity is generally no longer eligible for the nonpublic company treatment alternatives when it is in the process of becoming a public entity. Such entities must comply with public company treatment alternatives in the standard as of the date that all public companies were required to adopt the standard, even if that requires a company that is in the process of filing an IPO to restate prior period financial statements.

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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.