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Chapter 6 — Convertible Debt

6.5 Stock-Settled Debt

6.5 Stock-Settled Debt

A financial instrument issued in the form of debt or equity that embodies an unconditional obligation that the issuing entity must settle by issuing a variable number of common shares equal to a fixed monetary amount must be classified as a liability under ASC 480-10-25-14 and is often referred to as “stock-settled debt.” Although a stock-settled debt instrument does not provide the holder with any potential “upside” from increases in the issuing entity’s common stock, it meets the definition of a convertible security; therefore, the if-converted method of calculating diluted EPS must be applied to such an instrument. In applying the if-converted method, an entity should include in the denominator the number of common shares that would be issuable to settle the instrument on the basis of the conversion terms that are most advantageous to the holder, as required by ASC 260-10-45-21.