![]() For example, the contractual provisions of an equity instrument may require its redemption by the issuer upon the occurrence of a change-in-control that does not result in the liquidation or termination of the issuing entity, a delisting of the issuer's securities from an exchange, or the violation of a debt covenant. ![]() Other transactions are considered deemed liquidation events. In other words, if the payment of cash or other assets is required only from the distribution of net assets upon the final liquidation or termination of an entity (which may be a less-than-wholly-owned consolidated subsidiary), then that potential event need not be considered when applying ASR 268. Ordinary liquidation events, which involve the redemption and liquidation of all of an entity's equity instruments for cash or other assets of the entity, do not result in an equity instrument being subject to ASR 268. See FG 5.4.4 for additional information on whether put and call options embedded in an equity host must be bifurcated and accounted for separately.Ĭertain redemptions upon liquidation events. ![]() In this case, the issuer would need to evaluate whether the put feature meets the requirements for the scope exception for certain contracts involving an entity’s own equity in ASC 815-10-15-74(a). A put feature embedded in exchange traded preferred stock (deemed to be an equity host and that is readily convertible to cash) which requires gross physical settlement would likely meet the definition of a derivative. As such, the embedded put feature would not require separate accounting. A put feature embedded in preferred stock (deemed to be an equity host and that is not readily convertible to cash) which requires gross physical settlement will likely not meet the definition of a derivative. See FG 1.6.1 for information on whether a put or call option embedded in a debt host must be bifurcated and accounted for separately. This accounting is consistent with the guidance in ASC 815-15-40-4, which addresses the extinguishment of convertible debt with a separate equity component as a result of a prior modification of the embedded conversion option, as well as with current practice related to the redemption of convertible debt instruments issued at a substantial premium.Ī put or call feature embedded in preferred stock (deemed to be a debt host) will meet the definition of a derivative. These gains or losses may not impact earnings but may impact EPS computations. As a result, if the instrument is subsequently redeemed, amounts in APC would be considered in computing any gain or loss to be recognized upon extinguishment of the convertible preferred stock. However, amounts reported within APIC should be considered in the accounting for a redemption or extinguishment of a mezzanine-classified convertible preferred instrument. Since the value of the effect of a down round is reported within APIC in permanent equity and the convertible preferred stock is reported in mezzanine equity, any subsequent accretion to a redemption price under ASC 480-10-S99 would not consider the amount reported in APIC. We understand that the SEC staff has stated that the recognition of a down round feature on a mezzanine-classified convertible preferred security should be recorded as a charge to retained earnings and a credit to APIC in permanent equity and would object to a triggered down round being recorded as an adjustment to amounts reported in mezzanine equity. There are additional considerations when a down round feature is triggered in a convertible preferred security that is classified as mezzanine equity under the guidance in ASC 480-10-S99. Transfers and servicing of financial assets Revenue from contracts with customers (ASC 606) Loans and investments (post ASU 2016-13 and ASC 326) Investments in debt and equity securities (pre ASU 2016-13) ![]() Insurance contracts for insurance entities (pre ASU 2018-12) Insurance contracts for insurance entities (post ASU 2018-12) IFRS and US GAAP: Similarities and differences Business combinations and noncontrolling interestsĮquity method investments and joint ventures ![]()
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