6.3 Accounting
ASC 480-10
30-7 All other financial instruments recognized under the guidance in Section 480-10-25 shall be measured initially at fair value.
35-1 Financial instruments within the scope of Topic 815 shall be measured subsequently as required by the provisions of that Topic.
35-4A Contingent consideration issued in a business combination that is classified as a liability in accordance with the requirements of this Topic shall be subsequently measured at fair value in accordance with 805-30-35-1.
35-5 All other financial instruments recognized under the guidance in Section 480-10-25 shall be measured subsequently at fair value with changes in fair value recognized in earnings, unless either this Subtopic or another Subtopic specifies another measurement attribute.
55-17 In contrast to forward
purchase contracts that require physical settlement in
exchange for cash, forward purchase contracts that require
or permit net cash settlement, require or permit net share
settlement, or require physical settlement in exchange for
specified quantities of assets other than cash are measured
initially and subsequently at fair value, as provided in
paragraphs 480-10-30-2, 480-10-30-7, 480-10-35-1, and
480-10-35-5 (as applicable), and classified as assets or
liabilities depending on the fair value of the contracts on
the reporting date.
A financial instrument that must be accounted for as an asset or a liability
under ASC 480-10-25-14 is initially and subsequently measured at fair value, with
changes in fair value recognized in earnings unless a different accounting treatment
is permitted or required by other GAAP (e.g., share-settled debt that is accounted
for at amortized cost by using the interest method in accordance with ASC
835-30).
Unless the fair value option is elected, share-settled debt1 whose monetary value represents a fixed or predominantly fixed monetary amount
should be accounted for at amortized cost in accordance with the interest method in
ASC 835-30. For example, if a financial instrument must be settled by the issuance
of $200,000 worth of equity shares, this arrangement would generally be more like a
debtor-creditor relationship than an ownership relationship. Further, the last
sentence of ASC 480-10-55-22 (i.e., upon “issuance of the shares to settle the
obligation, equity is increased by the amount of the liability and no gain or loss
is recognized for the difference between the average and the ending market price”)
implicitly acknowledges that a fixed-monetary-value share-settled debt arrangement
is not required to be measured at fair value through earnings. The paragraph
provides guidance on whether a gain or loss should be recognized related to the
difference between the average and ending market price upon the settlement of a
share-settled debt arrangement for which the number of shares that will be delivered
is determined on the basis of an average stock price as opposed to the ending stock
price. Had the instrument in ASC 480-10-55-22 been measured on an ongoing basis at
fair value (i.e., on the basis of a current stock price), there should have been no
difference to address at settlement after the issuer had updated its prior fair
value estimate.
Example 6-8
Variable-Share-Settled Obligation — Fixed Monetary
Amount
In October 20X0, Issuer T issued an obligation to deliver a variable number of its equity shares to Entity K, which can elect to require settlement of the obligation at any time starting in January 20X1. The obligation is not in the form of an outstanding share. Upon settlement, T will issue a variable number of shares of its common stock that has a fair value equal to $20 million. The fair value of common stock will be determined on the basis of the weighted average price of the common stock for the 20 consecutive trading days preceding settlement. The obligation is classified as a liability under ASC 480-10-25-14 because the monetary value of its settlement amount is predominantly fixed and the obligation is not in the form of an outstanding share. Company T determines that it would be appropriate to account for the obligation as share-settled debt at amortized cost since the obligation is repayable on demand at a predominantly fixed monetary amount.
On January 15, 20X1, K exercised its option to demand settlement. Company T issued 225,000 shares of common stock, which had a fair value of approximately $25 million measured on the basis of the current stock price on the settlement date. The excess of the fair value of the common stock over the $20 million carrying amount of the liability was the result of an increase in the common stock price during the averaging period. That is, the weighted average stock price for the 20 days in the averaging period was less than the current stock price at settlement. In a manner consistent with ASC 480-10-55-22, T should not recognize a loss for the excess of the current fair value of the common shares delivered at settlement over the $20 million carrying amount of the liability for the obligation.
Footnotes
1
In this Roadmap, the term “share-settled debt” is used to
describe a share-settled obligation that is not in the legal form of debt
but has the same economic payoff profile as debt. Financial instruments that
are in the legal form of debt are outside the scope of ASC 480 (see
Section
2.2.4).