2.1 Instruments Potentially Indexed to, and Potentially Settled in, the Entity’s Own Equity

ASC 815-40

15-1 The guidance in this Subtopic applies to all entities.

15-2 The guidance in this Subtopic applies to freestanding contracts that are potentially indexed to, and potentially settled in, an entity’s own stock.

15-2A The scope of this Subtopic includes security price guarantees or other financial instruments indexed to, or otherwise based on, the price of the entity’s stock that are issued in connection with a business combination and that are accounted for as contingent consideration.

15-4 The guidance in this Subtopic applies to derivatives embedded in contracts in analyzing the embedded feature under paragraphs 815-15-25-1(c) and 815-15-25-14 as though it were a freestanding instrument (as further discussed in paragraphs 815-40-25-39 through 25-40).

ASC 815-40 applies to both public business entities (including SEC registrants) and private companies. The guidance focuses on freestanding contracts (see Section 3.2) that have the following characteristics (ASC 815-40-15-2):

Characteristic	ASC Reference	Roadmap Discussion
Potentially indexed to an entity’s own stock	ASC 815-40-15 provides guidance on determining whether an equity-linked instrument is considered indexed to an entity’s own stock.	Chapter 4
Potentially settled in an entity’s own stock	ASC 815-40-25 provides guidance on whether an entity has the ability to settle an equity-linked instrument in its own stock or could be forced to net cash settle it.	Chapter 5

Unless a specific scope exception applies, therefore, the following types of instruments would be within the scope of ASC 815-40:

A freestanding call option written by the entity that gives the holder a right to purchase equity shares of the entity.
A freestanding call option that gives the entity a right to repurchase outstanding shares.
A freestanding warrant issued by the entity to a shareholder giving it the right to subscribe to additional equity shares of the entity.
A freestanding put option that gives the entity the right to sell shares to the writer of the option.
A freestanding forward contract that commits the entity to issue additional equity shares or the resale of treasury shares.
Contracts issued as contingent consideration in a business combination that are indexed to, or otherwise based on, the price of the entity’s stock.

As noted in ASC 815-40-15-4, the indexation and equity classification guidance in ASC 815-40 also applies to some embedded features that have all the characteristics of a derivative instrument in an entity’s determination of whether such features are exempt from bifurcation under ASC 815-15 (see Section 2.2).

ASC 815-40 does not directly apply to outstanding equity shares (e.g., common or preferred equity securities). Nevertheless, some equity shares contain embedded features that may require evaluation under the indexation and equity classification guidance in ASC 815-40 (e.g., an equity conversion option in a convertible preferred stock contract, provided the option has the characteristics of a derivative instrument and is not clearly and closely related to the host contract; see Section 2.2).

ASC 815-40 does not apply to the counterparty of an equity-linked financial instrument. From the counterparty’s perspective, the contract is not on its own equity. For example, if an entity writes a call option on its own equity to a third party, the holder of that call option would not apply ASC 815-40 to the contract because from the counterparty’s perspective, the contract is indexed to another entity’s equity. (See also ASC 815-10-15-75.) Because ASC 815-40 does not apply to the counterparty of an equity-linked financial instrument, an “entity” in this Roadmap refers to the reporting entity whose stock is the underlying instrument in the contract.

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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.