Chapter 6 — Certain Variable-Share Obligations

6.4 Reassessment

Under ASC 480-10-25-14, an entity assesses whether an obligation has a monetary value that is based either solely or predominantly on a fixed monetary amount, on variations in something other than the fair value of the issuer’s equity shares, or on variations inversely related to changes in the fair value of the issuer’s equity shares. Such assessment is performed only at inception or upon a modification that is treated as a new instrument for accounting purposes (e.g., as a result of a modification or exchange that is accounted for as an extinguishment of the existing instrument; see ASC 470-50). There is no subsequent reassessment of whether the monetary value is based solely or predominantly on one of those factors. Further, as discussed in Section 3.2.1, the issuer does not reassess whether a feature is nonsubstantive or minimal after inception.

Example 6-9

Variable-Share-Settled Obligation — Number of Shares Becomes Fixed

On January 1, 20X0, Issuer W issued an obligation to deliver a variable number of its equity shares to Entity M. Significant terms of the obligation are as follows:

The number of shares to be issued depends on specified revenue targets achieved by a nonconsolidated joint venture that is owned equally by W and M.
The number of shares issuable will be determined at the end of 20X2 on the basis of the revenue targets achieved for the two years ending December 31, 20X2, and W’s weighted average stock price for the 30-day period ending December 31, 20X2.
Issuer W is obligated to issue the shares owed to M on December 31, 20X3. This delayed delivery exists as a result of a regulatory ownership restriction.

At the inception of the contract, W determined that it was required to classify the share-issuance obligation as a liability under ASC 480-10-25-14. Although the number of shares issuable became fixed on December 31, 20X2, W is not permitted to reclassify the liability amount into equity because the monetary value of a variable-share settled obligation may only be assessed at the contract’s inception.

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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.