3.5 Allocation of Proceeds and Issuance Costs

3.5.1 Overview

This section discusses how an issuer should allocate proceeds (see Section 3.5.2) and issuance costs (see Section 3.5.3) among freestanding financial instruments when those instruments are issued in a single transaction as well as the guidance in ASC 470-20 on the issuer’s allocation of proceeds between debt and detachable warrants (see Section 3.5.2.3.1). The allocation of such amounts to components or features contained in a freestanding convertible instrument is briefly addressed in Section 3.5.4.

3.5.2 Allocation of Proceeds

3.5.2.1 Overview

The amount of proceeds attributable to a financial instrument affects the determination of its initial carrying amount. ASC 835-30-25-4 specifies that if a debt instrument is issued solely for cash and the transaction does not involve any other stated or unstated rights or privileges, its present value at initial recognition is presumed to equal the amount of cash proceeds received from the investor. As indicated in ASC 820-10-30-3, if a financial instrument is measured at fair value upon initial recognition (e.g., derivative instruments and financial liabilities for which the issuer has elected the fair value option in ASC 825-10), “[i]n many cases, the transaction price [such as cash proceeds received] will equal the fair value,” although not always (see also ASC 820-10-30-3A for further guidance).

Generally, one of the following two approaches applies to the issuer’s allocation of proceeds received among freestanding financial instruments that are part of the same transaction:

A with-and-without method (also known as a residual method; see Section 3.5.2.2).
A relative fair value method (see Section 3.5.2.3).

The appropriate allocation method depends on the accounting that applies to each freestanding financial instrument issued as part of the transaction. The issuer should also consider whether it is necessary to allocate an amount to any other rights or privileges included in the transaction (see Section 3.5.2.4). Proceeds must be allocated among freestanding financial instruments before any amounts can be allocated to component parts of a freestanding financial instrument such as a convertible debt instrument (e.g., to an equity component that is separately recognized under ASC 470-20 or an embedded derivative instrument that is bifurcated under ASC 815-15; see Section 3.5.4).1

3.5.2.2 With-and-Without Method

If one or more, but not all, of the freestanding financial instruments issued as part of a single transaction must be recognized as assets or liabilities measured at fair value on a recurring basis (e.g., one of the instruments is accounted for as a derivative instrument under ASC 815 or at fair value under the fair value option in ASC 825-10), the with-and-without method should be applied in the allocation of proceeds among the freestanding financial instruments. This approach is analogous to the allocation method for bifurcated embedded derivatives in ASC 815-15-30-2 and 30-3.

Under the with-and-without method, a portion of the proceeds equal to the fair value of the instrument (or instruments) measured at fair value on a recurring basis is first allocated to that instrument (or instruments) on the basis of its fair value as of the initial measurement date. The remaining proceeds are then allocated to the other instrument (or instruments) issued in the same transaction either on a residual basis, if there is only one remaining instrument, or by using a relative fair value approach, if there are multiple remaining instruments. The with-and-without allocation approach avoids the recognition of a “day one” gain or loss in earnings that is not associated with a change in the fair value of the instrument (or instruments) that is subsequently measured at its fair value. Under this approach, if there is only one freestanding financial instrument to which the residual proceeds are allocated, the issuer is not required to estimate that instrument’s fair value.

Example 3-1

Debt Issued With Liability-Classified Warrants

Company C issues debt to Company B, together with a detachable and separately transferable warrant, for total proceeds of $10,000, which is also the par amount of the debt. The warrant gives the holder the right to purchase shares issued by C, which are redeemable for cash at the holder’s option. Company C determines that the debt and the warrant represent separate freestanding financial instruments.

Rather than electing to account for the debt by using the fair value option in ASC 825-10, C will account for it by using the interest method in ASC 835-30. In evaluating whether the warrant is within the scope of ASC 480-10, C determines that the warrant is a freestanding financial instrument that embodies an obligation to repurchase the issuer’s equity shares and may require the issuer to settle the obligation by transferring assets. In a manner consistent with the guidance in ASC 480-10, C will account for the warrant as a liability that is measured both initially and subsequently at fair value, with changes in fair value recognized in earnings (see Deloitte’s Roadmap Distinguishing Liabilities From Equity). Company C estimates that the initial fair value of the warrant is $2,000.

In determining the initial carrying amounts, C allocates the proceeds received between the debt and the warrant. Because the warrant, but not the debt, will be measured at fair value, with changes in fair value recognized in earnings, C should first measure the fair value of the warrant ($2,000) and allocate that amount to the warrant liability. The amount of proceeds allocated to the debt is the difference between the total proceeds received ($10,000) and the fair value of the warrant ($2,000). The resulting discount from the par amount of the debt ($2,000) is accreted to par by using the effective-interest method in ASC 835-30.

3.5.2.2.1 Estimated Fair Values Exceed Proceeds Received

In some circumstances, the initial fair value of the items that must be subsequently measured at fair value exceeds the proceeds received. At the 2014 AICPA Conference on Current SEC and PCAOB Developments, then SEC Office of the Chief Accountant (OCA) Professional Accounting Fellow Hillary Salo addressed the allocation of proceeds related to the issuance of a hybrid instrument in situations in which the initial fair value of the financial liabilities that must be measured at fair value (such as embedded derivatives) exceeds the net proceeds received. She provided an example in which “a reporting entity that wants to align itself with a specific investor issues $10 million of convertible debt at par and is required to bifurcate an in the money conversion option with a fair value of $12 million.” Ms. Salo’s remarks are also applicable by analogy to freestanding financial instruments (e.g., debt issued with detachable warrants) when (1) one or more instruments are measured at fair value, with changes in fair value recognized in earnings, and (2) the initial fair value of items that must be remeasured at fair value exceeds the amount of the proceeds received.

Example 3-2

Debt With Detachable Warrants

Entity Y issues debt and detachable warrants for $100 million of cash proceeds. The entity elects to account for the debt at fair value under the fair value option in ASC 825-10. In accordance with ASC 815, Y must account for the warrants as derivatives at fair value. The total estimated fair value of the debt and the warrants is $120 million as of the issuance date.

Ms. Salo made the following remarks:

[T]he staff believes that when reporting entities analyze these types of unique fact patterns, they should first, and most importantly, verify that the fair values of the financial liabilities required to be measured at fair value are appropriate under Topic 820. [Footnote omitted] If appropriate, then the reporting entity should evaluate whether the transaction was conducted on an arm’s length basis, including an assessment as to whether the parties involved are related parties under Topic 850. [Footnote omitted] Lastly, if at arm’s length between unrelated parties, a reporting entity should evaluate all elements of the transaction to determine if there are any other rights or privileges received that meet the definition of an asset under other applicable guidance.

In the fact patterns analyzed by the staff, we concluded that if no other rights or privileges that require separate accounting recognition as an asset could be identified, the financial liabilities that are required to be measured at fair value (for example, embedded derivatives) should be recorded at fair value with the excess of the fair value over the net proceeds received recognized as a loss in earnings. Furthermore, given the unique nature of these transactions, we would expect reporting entities to provide clear and robust disclosure of the nature of the transaction, including reasons why the entity entered into the transaction and the benefits received.

Additionally, some people may wonder whether the staff would reach a similar conclusion if a transaction was not at arm’s length or was entered into with a related party. We believe those fact patterns require significant judgment; therefore, we would encourage consultation with OCA in those circumstances.

Accordingly, an entity should perform the following steps in determining the appropriate accounting (unless otherwise noted, the quoted text is from Ms. Salo’s speech):

Step 1 — “[V]erify that the fair values of the financial liabilities required to be measured at fair value are appropriate under Topic 820.”

If the entity has not complied with the fair value measurement requirements in ASC 820 regarding its estimated values, it should adjust those values to ensure its compliance. For a detailed discussion of the requirements in ASC 820, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).
Step 2 — “[E]valuate whether the transaction was conducted on an arm’s length basis, including an assessment as to whether the parties involved are related parties under Topic 850.”

As noted in ASC 820-10-35-2, a “fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions.” ASC 820-10-20 defines market participants, in part, as parties that are independent of each other (i.e., not related parties). A transaction price may not represent fair value if, for example, (1) the transaction was between related parties or took place under duress or (2) the entity was forced to accept the transaction price because of financial difficulties.

In practice, a pro rata distribution to equity owners is recognized as an equity transaction (i.e., as a deemed dividend with a debit to retained earnings or other applicable equity account), whereas a non-pro-rata distribution is recognized as a charge to earnings in the period in which the distribution is declared. Thus, if a wholly owned subsidiary issues debt to its parent, any excess of the fair value of the instruments issued over the proceeds received might represent a deemed dividend from the subsidiary to the parent. If a related-party transaction represents a non-pro-rata distribution, however, expense recognition may be appropriate.
Step 3 — “[E]valuate all elements of the transaction to determine if there are any other rights or privileges received that meet the definition of an asset under other applicable guidance.”

If the transaction was conducted at arm’s length and the total fair value of the liabilities measured at fair value exceeds the proceeds received, an entity should carefully evaluate whether the difference is attributable to some other transaction element that qualifies for accounting recognition (e.g., separate freestanding financial instruments or other rights or privileges). If so, those elements should be recognized separately (e.g., as an asset or expense in accordance with other applicable GAAP). By analogy, under paragraph 3 of FTB 85-6 (partially codified in ASC 505-30), it is presumed that a purchase of shares at a price significantly in excess of the open market price includes amounts attributable to other items:

A purchase of shares at a price significantly in excess of the current market price creates a presumption that the purchase price includes amounts attributable to items other than the shares purchased. For example, the selling shareholder may agree to abandon certain acquisition plans, forego other planned transactions, settle litigation, settle employment contracts, or restrict voluntarily the ability to purchase shares of the company or its affiliates within a stated time period.

If, after performing these steps, an entity determines that no other transaction elements can be identified, the excess of the fair value over the proceeds is recognized as an expense (an up-front loss). In this circumstance, the SEC staff expects the entity “to provide clear and robust disclosure of the nature of the transaction, including reasons why the entity entered into the transaction and the benefits received.”

3.5.2.3 Relative Fair Value Method

The relative fair value method is appropriate if either of the following applies: (1) none of the freestanding financial instruments issued as part of a single transaction are measured at fair value, with changes in fair value recognized in earnings on a recurring basis, or (2) after the entity measures freestanding financial instruments at fair value under the with-and-without method, more than one freestanding financial instrument is not subsequently measured at fair value on a recurring basis. To apply this method, the entity allocates the proceeds (or remaining proceeds after application of the with-and-without method) on the basis of the fair values of each freestanding financial instrument at the time of issuance. ASC 470-20-25-2 requires an entity to use the relative fair value allocation approach to allocate proceeds in certain transactions involving debt and detachable warrants. The approach is also appropriate for other transactions that involve freestanding financial instruments not measured at fair value on a recurring basis.

Under the relative fair value method, the issuer makes separate estimates of the fair value of each freestanding financial instrument and then allocates the proceeds in proportion to those fair value amounts (e.g., if the estimated fair value of one of the instruments is 20 percent of the sum of the estimated fair values of each of the instruments issued in the transaction, 20 percent of the proceeds would be allocated to that instrument). Because an issuer needs to independently measure each freestanding financial instrument issued as part of the transaction, more fair value estimates are required under the relative fair value method than under the with-and-without method.

In some transactions involving the issuance of more than two freestanding financial instruments, both the with-and-without method and the relative fair value method will apply. For example, if one freestanding financial instrument is measured at fair value on a recurring basis and others are not, the freestanding financial instrument that is subsequently measured at fair value on a recurring basis should be initially measured at its fair value, and the remaining amount of proceeds should be allocated among the freestanding financial instruments not subsequently measured at fair value on the basis of their relative fair values.

After allocating the proceeds to the freestanding financial instruments under the appropriate method or methods, as described above, the entity should separate any component parts from an individual freestanding financial instrument in accordance with applicable GAAP (see Section 3.5.4).

3.5.2.3.1 Debt With Detachable Warrants

ASC 470-20

25-2 Proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants shall be accounted for as paid-in capital. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction. This usually results in a discount (or, occasionally, a reduced premium), which shall be accounted for under Topic 835.

25-3 The same accounting treatment applies to issues of debt instruments (issued with detachable warrants) that may be surrendered in settlement of the exercise price of the warrant. However, if stock purchase warrants are not detachable from the debt instrument and the debt instrument must be surrendered to exercise the warrant, the two instruments taken together are substantially equivalent to a convertible debt instrument and the accounting specified in paragraph 470-20-25-12 shall apply.

30-1 The allocation of proceeds under paragraph 470-20-25-2 shall be based on the relative fair values of the two instruments at time of issuance. If a commitment date must be identified in accordance with paragraphs 470-20-30-9 through 30-12 for purposes of applying the guidance on beneficial conversion features, that commitment date shall be used also to determine the relative fair values of all instruments issued together with a convertible instrument when allocating the proceeds to the separate instruments pursuant to this paragraph.

30-2 When detachable warrants (detachable call options) are issued in conjunction with a debt instrument as consideration in purchase transactions, the amounts attributable to each class of instrument issued shall be determined separately, based on values at the time of issuance. The debt discount or premium shall be determined by comparing the value attributed to the debt instrument with the face amount thereof.

When an entity issues debt together with detachable stock purchase warrants that represent separate freestanding financial instruments (see Section 3.4.2), the proceeds received must be allocated between the debt and the warrants. Although ASC 470-20-25-2 may appear to suggest that the relative fair value method should always be applied to debt issued together with detachable warrants, the scope of this guidance is limited to situations in which the warrants are classified as equity and the debt is not subsequently measured at fair value on a recurring basis. While ASC 470-20-25-2 suggests that the amounts allocated to detachable warrants should be accounted for as paid-in capital, that guidance conflicts with other GAAP that require entities to classify certain contracts on the entity’s own equity as assets or liabilities (e.g., ASC 480-10 and ASC 815).

Before the FASB’s codification of U.S. GAAP, the guidance on debt and detachable warrants in ASC 470-20 was contained in APB Opinion 14. When the FASB and EITF subsequently issued guidance on evaluating whether warrants and other contracts on an entity’s own equity should be classified as equity or liabilities (e.g., FASB Statement 150 and EITF Issue 00-19), they did not make consequential amendments to APB Opinion 14. However, in practice, it is generally understood and accepted that the guidance in APB Opinion 14 (as codified in ASC 470-20-25-2) on the classification of detachable stock purchase warrants should be interpreted in light of that subsequent guidance. Neither ASC 480-10 nor ASC 815 exempts detachable warrants on the issuer’s equity shares from its scope.

The portion of the proceeds allocated to the warrants should therefore be accounted for as paid-in capital only if the warrants qualify for classification as equity under ASC 815-40 and other applicable GAAP. If warrants must be classified as an asset or liability under ASC 480-10 or other GAAP, the amount attributable to the warrants should be accounted for under that other guidance. Accordingly, an entity should not rely solely on the guidance in ASC 470-20-25-2 and 25-3 when classifying detachable warrants as liabilities or equity or when allocating proceeds between debt and detachable warrants.

Connecting the Dots

For a discussion of how to determine the appropriate classification and measurement of a detachable warrant, see Deloitte’s Roadmaps Contracts on an Entity’s Own Equity and Distinguishing Liabilities From Equity.

The following table provides an overview of the appropriate allocation of proceeds between debt and detachable warrants at initial recognition:

	Warrant Accounted for at Fair Value, With Fair Value Changes Recognized in Earnings	Warrant Classified as Equity
Debt accounted for at amortized cost	With-and-without method under which the warrant is measured initially at fair value and the debt is measured as the residual (see Section 3.5.2.2).	Relative fair value method
Debt accounted for at fair value, with changes in fair value recognized in earnings	If the estimated fair values exceed the proceeds received, special considerations apply (see Section 3.5.2.2.1). If it is determined that the transaction price does not represent fair value, additional considerations are also necessary. Otherwise, a relative fair value method may be reasonable.	With-and-without method under which the debt is measured initially at fair value and the warrant is measured as the residual (see Section 3.5.2.2)

3.5.2.4 Other Transaction Components

The issuer should consider whether U.S. GAAP require allocation of any amount to stated or unstated rights or privileges included in the transaction other than the freestanding financial instruments issued. Although ASC 470-20 explicitly requires entities to evaluate whether this allocation is required only for instruments subject to the CCF guidance (see Section 6.3.5), the guidance applies equally to other instruments within the scope of ASC 470-20. For example, if a company issues a three-year note that pays no interest in exchange for cash equal to the face amount of the note and the holder’s right to purchase products at a below-market price, the company might be required to recognize those rights separately in a manner consistent with the guidance in ASC 835-30-25-6.

3.5.3 Allocation of Issuance Costs

3.5.3.1 Concept of Issuance Costs

Issuance costs are specific incremental costs that are (1) paid to third parties and (2) directly attributable to the issuance of a debt or equity instrument. Thus, issuance costs represent costs incurred with third parties that result directly from and are essential to the financing transaction and would not have been incurred by the issuer had the financing transaction not occurred. Examples of costs that may qualify as issuance costs include underwriting fees, professional fees paid to attorneys and accountants, printing and other document preparation costs, travel costs, and registration and listing fees directly related to the issuance of the instrument. In accordance with ASC 470-20-30-13, however, “[a]ny amounts paid to the investor when the transaction is consummated represent a reduction in the proceeds received by the issuer (not issuance costs).” For example, commitment fees, origination fees, and other amounts paid to the investor (such as reimbursement of the investor’s expenses) represent a reduction of the proceeds, not an issuance cost.2

Costs that would have been incurred irrespective of whether there is a proposed or actual offering do not qualify as issuance costs. For example, in accordance with SAB Topic 5.A (reproduced in ASC 340-10-S99-1), allocated management salaries and other general and administrative expenses do not represent an issuance cost. Similarly, legal and accounting fees that would have been incurred irrespective of whether the instrument was issued are not issuance costs (see AICPA Technical Q&As Section 4110.01). Further, the SEC staff believes that if a proposed offering is aborted (including the postponement of an offering for more than 90 days), its associated costs do not represent issuance costs of a subsequent offering.

Unless a debt instrument is subsequently measured at fair value on a recurring basis, any issuance costs attributable to the initial sale of the instrument should be offset against the associated proceeds in the determination of the instrument’s initial net carrying amount (see ASC 835-30-45-1A). Similarly, issuance costs attributable to the initial sale of an equity instrument should be deducted from the related proceeds (see SAB Topic 5.A and AICPA Technical Q&As Section 4110.01). (See Section 3.5.3.2 for a discussion of the allocation of issuance costs to multiple freestanding financial instruments issued as part of the same transaction.)

However, as indicated in ASC 825-10-25-3, if the fair value option has been elected for a debt instrument, “[u]pfront costs and fees [are] recognized in earnings as incurred and not deferred” (see Section 2.5). Any issuance costs allocated to other instruments that are subsequently measured at fair value, with changes in fair value recognized in earnings (e.g., derivative instruments), also are recognized in the period incurred since they are not a characteristic of the asset or liability (see ASC 820-10-35-9B).

3.5.3.2 Allocation Methods

Entities should consistently apply a systematic and rational method for allocating issuance costs among freestanding financial instruments that form part of the same transaction. In limited circumstances, U.S. GAAP prescribe a specific allocation method for such costs (e.g., for allocating issuance costs between the liability and equity components of instruments subject to the CCF guidance in ASC 470-20; see Section 6.3.4). Otherwise, the allocation method depends on the specific facts and circumstances. If the proceeds are allocated solely on the basis of the relative fair value method, issuance costs should also be allocated on that basis, which is consistent with the guidance in SAB Topic 2.A.6 (reproduced in ASC 340-10-S99-2). We generally believe that if an entity uses the with-and-without method (including allocation to a freestanding financial instrument that contains an embedded derivative that must be bifurcated from its host contract), one of the following two methods is appropriate:

The relative fair value method — The issuer would allocate issuance costs on the basis of the relative fair values of the freestanding financial instruments by analogy to the allocation of proceeds to debt instruments with detachable warrants in ASC 470-20-25-2. SAB Topic 2.A.6 (reproduced in ASC 340-10-S99-2) states that this method should be applied in the allocation of costs between services received “[w]hen an investment banker provides services in connection with a business combination or asset acquisition and also provides underwriting services associated with the issuance of debt or equity securities.” However, if no proceeds are allocated to the debt under the with-and-without method, any issuance costs allocated to the debt under the relative fair value method should be expensed as incurred because it would be inappropriate to present a debt liability as an asset.
An approach that is consistent with the allocation of proceeds — The issuer would allocate issuance costs in proportion to the allocation of proceeds between the freestanding financial instruments (see Section 3.5.2). ASC 470-20-30-31 requires entities to use this approach when allocating issuance costs between the liability and equity components of convertible instruments within the scope of the CCF guidance in ASC 470-20.

The method used should be applied consistently to similar transactions. Any issuance costs allocated to a freestanding or an embedded financial instrument that is subsequently measured at fair value through earnings must be expensed as of the issuance date (see, e.g., ASC 825-10-25-3).

3.5.3.3 Transactions That Involve the Receipt of Noncash Financial Assets

If an entity issuing debt receives consideration that includes noncash financial assets (e.g., tranche debt financings that include the issuance of debt and the receipt of loan commitments), the related transaction costs (i.e., incremental direct issuance costs) may be allocated in one of two ways:

The costs are allocated only to the financial liabilities or equity issued. No costs are allocated to the noncash financial assets received since they form part of the proceeds received, which are allocated to the financial instruments issued.
The costs are allocated to both the noncash financial assets received and the financial liabilities or equity issued without regard to whether the fair values are positive or negative (i.e., by using absolute values). Costs and fees are allocated to the noncash financial assets on the basis that transaction costs would have been incurred in a stand-alone transaction for those assets.

Example 3-3

Tranche Debt Financing With Warrants

Entity S enters into a tranche debt financing arrangement with an investment firm. On the initial closing date, S issues to the investment firm a note payable with a principal amount of $30 million and warrants on its own stock. In exchange, S receives cash proceeds of $30 million and a loan commitment under which it may draw up to $200 million of additional notes if certain business milestones are met. In addition, S incurs $3.2 million of third-party costs directly attributable to the financing arrangement.

Entity S determines that the note payable, the warrants, and the loan commitment represent separate units of account. It engages a valuation specialist, who provides the following fair value estimates:

Note payable — $16,532,595.
Loan commitment asset — $38,385,821.
Warrants — $51,853,226.

Entity S does not elect to account for the note payable by using the fair value option in ASC 825-10. Its policy is to allocate issuance costs on a relative fair value basis by analogy to ASC 470-20-25-2 (see Section 3.5.3.2). Accordingly, S can elect to allocate the third-party issuance costs in one of the following two ways:

Allocation Approach 1 — Allocate Third-Party Issuance Costs Only to the Debt and Warrants

Under this approach, an entity allocates the proceeds received, after deducting third-party costs, to the debt and warrants on the basis of their relative fair values. No third-party costs are allocated to the loan commitment asset since that asset forms part of the proceeds received.

Allocation Approach 2 — Allocate Third-Party Issuance Costs to the Debt, the Warrants, and the Loan Commitment Asset

Under this approach, an entity allocates third-party costs to the debt, warrants, and loan commitment asset on the basis of their relative fair values without regard to whether the fair values are positive or negative (i.e., by using absolute values). The allocation of some third-party costs to the loan commitment asset is consistent with the treatment of transaction costs associated with financial assets that are not classified as held for trading (i.e., if only a loan commitment had been obtained, there could have been third-party costs that would be capitalizable).

Note that to allocate the costs under this approach, an entity determines the relative fair values on the basis of the absolute amounts of the items since it would be inappropriate to allocate negative third-party costs to the loan commitment asset. Because the fair value of the proceeds received equals that of the financial instruments issued, the use of a relative fair value allocation methodology does not affect the allocation of proceeds to the financial instruments issued in this example.

3.5.4 Allocation to Components or Features Contained in a Freestanding Convertible Debt Instrument

The following table summarizes the approaches for allocating proceeds attributable to a freestanding convertible debt instrument to components or features contained in the instrument:

	Allocation Approach	Allocation Objective
Convertible instrument with a bifurcated embedded derivative (see Section 2.3)	With-and-without method. The embedded derivative is measured first at fair value, and the residual amount is allocated to the host contract.	To measure the embedded derivative at fair value in a manner similar to a freestanding derivative instrument
Traditional convertible debt (see Chapter 4)	Not applicable. All of the proceeds are recorded as debt.	To reflect the mutual exclusivity of debt repayment and conversion option exercise (i.e., both cannot happen)
Debt issued at a substantial premium (see Chapter 5)	With-and-without method. The debt is measured first at its principal amount, and the residual amount is allocated to equity.	To record a substantial premium received in equity
Instrument with a CCF (see Chapter 6)	With-and-without method. The liability component is measured first at fair value, and the residual amount is allocated to the equity component.	To reflect interest cost that is paid with the conversion feature
Instrument with a BCF (see Chapter 7)	With-and-without method. The BCF is measured first at its intrinsic value, and the residual amount is allocated to the instrument.	To record the intrinsic value of the conversion feature in equity

An entity may also need to allocate any amount presented in equity between temporary and permanent equity on the basis of the instrument’s redemption amount (e.g., for debt with a CCF; see Section 2.6) to highlight that some or all of that amount may not be available to the issuer as a permanent source of equity financing.

Footnotes

After applying the appropriate method for allocating proceeds among multiple freestanding financial instruments, an entity would evaluate whether any of those instruments contain embedded derivatives that require separation under ASC 815-15. The separation of an embedded derivative from its host contract is performed by using the with-and-without method as described in ASC 815-15-30-2 and 30-3.

Depending on the relationship between the issuer and the investor, amounts paid to the investor could represent a dividend or other distribution as opposed to an issuance cost. An entity should use judgment and consider the particular facts and circumstances when determining what these amounts represent.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.