# ASC 470-20-05: Debt — Debt with Conversion and Other Options — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/470/20/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:0fd89de3aa62f369aa611d2756cb856cdfd8fff2a1230f215cb804f52fce6d65 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 470-20-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/470/20/#05-overview-and-background) SEC content: no ##### [470-20-05-1](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:087c4169c17615909f32d37cf2959d1977516bf980d6ea13d5b193dfd5ac3a10 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic provides accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features and other options as follows: 1. a Debt instruments with detachable warrants 2. b Convertible debt instruments 3. c [Subparagraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). 4. d Interest forfeiture 5. e Induced conversions 6. f Conversion upon issuer's exercise of call option 7. g [Subparagraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). 8. h Own-share lending arrangements issued in contemplation of convertible debt issuance or other financing. ##### [470-20-05-1A](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-1A) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:6e0e97b7e848a7d09d2eb0fecc13778ccfcdb03e29ad07a2463bdcfdfd8bf601 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). #### Debt Instruments with Detachable Warrants ##### [470-20-05-2](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:4cc1a405835c607cc323f6b60622b3bff0bf964ac77ef0fa054ffcbf4abfe6ec Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Unlike convertible debt, debt with detachable warrants (detachable call options) to purchase stock is usually issued with the expectation that the debt will be repaid when it matures. The provisions of the debt agreement are usually more restrictive on the issuer and more protective of the investor than those for convertible debt. The terms of the warrants are influenced by the desire for a successful debt financing. Detachable warrants often trade separately from the debt instrument. Thus, the two elements of the security exist independently and may be treated as separate securities. ##### [470-20-05-3](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:bae86f533d2c0b1d9a6e120d41fec617be6754dfa32e774af39f0eef2ae5412e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. From the point of view of the issuer, the sale of a debt security with warrants results in a lower cash interest cost than would otherwise be possible or permits financing not otherwise practicable. The issuer usually cannot force the holders of the warrants to exercise them and purchase the stock. The issuer may, however, be required to issue shares of stock at some future date at a price lower than the market price existing at that time, as is true in the case of the conversion option of convertible debt. Under different conditions the warrants may expire without exercise. The outcome of the warrant feature thus cannot be determined at [time of issuance](https://asc.understandingaccounting.org/glossary/t/#time-of-issuance "The date when agreement as to terms has been reached and announced, even though the agreement is subject to certain further actions, such as directors' or stockholders' approval."). In either case the debt must generally be paid at maturity or earlier redemption date whether or not the warrants are exercised. #### Convertible Debt Instruments ##### [470-20-05-4](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:a2a14bdf6f5cce294402779c4dbc4a28de14365ad97041332eb891caba32e87e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A convertible debt instrument is a complex hybrid instrument bearing an option, the alternative choices of which cannot exist independently of one another. The holder ordinarily does not sell one right and retain the other. Furthermore, the two choices are mutually exclusive; they cannot both be consummated. Thus, the instrument will either be converted or be redeemed. The holder cannot exercise the option to convert unless he forgoes the right to redemption, and vice versa. ##### [470-20-05-5](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-5) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:0caff1c4fac2215baba7b60ca2295df5571c3cf0b877c3aaabb1e0ec76102877 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A convertible debt instrument may offer advantages to both the issuer and the purchaser. From the point of view of the issuer, convertible debt has a lower interest rate than does nonconvertible debt. Furthermore, the issuer of convertible debt instruments, in planning its long-range financing, may view convertible debt as essentially a means of raising equity capital. Thus, if the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") of the underlying common stock increases sufficiently in the future, the issuer can force conversion of the convertible debt into common stock by calling the issue for redemption. Under these market conditions, the issuer can effectively terminate the conversion option and eliminate the debt. If the fair value of the stock does not increase sufficiently to result in conversion of the debt, the issuer will have received the benefit of the cash proceeds to the scheduled maturity dates at a relatively low cash interest cost. ##### [470-20-05-6](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-6) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:18fb992d832a272642bcd3d9fc55da260c64f86a9d45dd97caea8c15ac493e38 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On the other hand, the purchaser obtains an option to receive either the face or redemption amount of the instrument or the number of common shares into which the instrument is convertible. If the fair value of the underlying common stock increases above the conversion price, the purchaser (either through conversion or through holding the convertible debt containing the conversion option) benefits through appreciation. The purchaser may at that time require the issuance of the common stock at a price lower than the fair value. However, should the fair value of the underlying common stock not increase in the future, the purchaser has the protection of a debt security. Thus, in the absence of default by the issuer, the purchaser would receive the principal and interest if the conversion option is not exercised. ##### [470-20-05-7](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-7) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:f725d6d2b69d6026abc57b2d0cfb6706a945ebccb22820468f0f074a9409d6b2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entities may issue convertible debt instruments that may be convertible into common stock at the lower of a conversion rate fixed at [time of issuance](https://asc.understandingaccounting.org/glossary/t/#time-of-issuance "The date when agreement as to terms has been reached and announced, even though the agreement is subject to certain further actions, such as directors' or stockholders' approval.") and a fixed discount to the market price of the common stock at the date of conversion. ##### [470-20-05-7A](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-7A) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:a976a0091b387823ecc4203988c24b97bc1a757e7217a3f94bbfe0e8381d2ab8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entities also may issue convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement. ##### [470-20-05-8](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-8) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:7667729413e3dc2d702e726e9e39da22acd310b7b9cff3cafb716c09a060b2d5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Certain convertible debt instruments may have a contingently adjustable conversion ratio; that is, a conversion price that is variable based on future events such as any of the following: 1. a A liquidation or a change in control of an entity 2. b A subsequent round of financing at a price lower than the [convertible security's](https://asc.understandingaccounting.org/glossary/c/#convertible-security "A security that is convertible into another security based on a conversion rate. For example, convertible preferred stock that is convertible into common stock on a two-for-one basis (two shares of common for each share of preferred).")original conversion price 3. c An initial public offering at a share price lower than an agreed-upon amount. ##### [470-20-05-8A](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-8A) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:bac8ea1afa1d9fa9bdc83e8927aaf479188054b85e17415cfb31e8a3b8c20608 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Certain convertible debt instruments may become convertible only upon the occurrence of a future event that is outside the control of the issuer or holder. #### Interest Forfeiture ##### [470-20-05-9](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-9) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:7e9bd72d02dcf22398305647e18f32d9ea5ffa84b96bcc50b57ba85481085e3f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When a convertible debt instrument is converted to equity securities, sometimes the terms of conversion provide that any accrued but unpaid interest at the date of conversion is forfeited by the former debt holder. This occurs either because the conversion date falls between interest payment dates or because there are no interest payment dates (a zero coupon convertible debt instrument). #### Induced Conversions ##### [470-20-05-10](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-10) Pending content: yes Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:bafcad530e3fdc286836d19c06d4e783a5aea64edb5e7024ca77ae0d5cf7c337 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Some convertible debt instruments include provisions allowing the debtor to alter terms of the debt to the benefit of debt holders. In some circumstances, conversion privileges for a convertible debt instrument are changed or additional consideration is paid to debt holders for the purpose of inducing prompt conversion of the debt to equity securities (sometimes referred to as a convertible debt sweetener). Such provisions may be general in nature, permitting the debtor or trustee to take actions to protect the interests of the debt holders, or they may be specific, for example, specifically authorizing the debtor to temporarily reduce the conversion price for the purpose of inducing conversion. Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance: [470-20-65-4](https://asc.understandingaccounting.org/asc/470/20/#470-20-65-4)Some convertible debt instruments include provisions allowing the debtor to alter terms of the debt to the benefit of debt holders. In some circumstances, conversion privileges for a convertible debt instrument are changed or additional consideration is paid to debt holders for the purpose of inducing prompt conversion of the debt instrument (sometimes referred to as a convertible debt sweetener). Such provisions may be general in nature, permitting the debtor or trustee to take actions to protect the interests of the debt holders, or they may be specific, for example, specifically authorizing the debtor to temporarily reduce the conversion price for the purpose of inducing conversion. #### Conversion Upon Issuer's Exercise of Call Option ##### [470-20-05-11](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-11) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:d6c82ec50f54bc66e59ca07d1bd070f662bcb2188a680b40dfc997cc4eecc94d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may issue equity securities to settle a debt instrument that was not otherwise currently convertible but became convertible upon the issuer's exercise of a call option when the issuance of equity securities is pursuant to the instrument's original conversion terms. This Subtopic provides related guidance. ##### [470-20-05-12](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-12) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:61b1137944472edeebfbd0672977b1ba815ace2bb24a05a1001f45148e526169 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). #### Own-Share Lending Arrangements Issued in Contemplation of Convertible Debt Issuance or Other Financing ##### [470-20-05-12A](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-12A) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:5c21c9e065c4d3fa645752fa1e4883264789ab1cada5f3507cc1a846ca07d10d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity for which the cost to an investment banking firm (investment bank) or third-party investors (investors) of borrowing its shares is prohibitive (for example, due to a lack of liquidity or extensive open short positions in the shares) may enter into share-lending arrangements that are executed separately but in connection with a convertible debt offering. Although the convertible debt instrument is ultimately sold to investors, the share-lending arrangement is an agreement between the entity (share lender) and an investment bank (share borrower) and is intended to facilitate the ability of the investors to hedge the conversion option in the entity's convertible debt. ##### [470-20-05-12B](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-12B) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:ff114041dc2f2385efdb456fdd892b89582d26027076f111037563b818aba88b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The terms of a share-lending arrangement require the entity to issue shares (loaned shares) to the investment bank in exchange for a nominal loan processing fee. Although the loaned shares are legally outstanding, the nominal loan processing fee is typically equal to the par value of the common stock, which is significantly less than the fair value of the loaned shares or the share-lending arrangement. Generally, upon maturity or conversion of the convertible debt, the investment bank is required to return the loaned shares to the entity for no additional consideration. ##### [470-20-05-12C](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-12C) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:3d6234b7b351f68888e87a45ef9601e9948b7d74287cda47840099492b5663a9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Other terms of a share-lending arrangement typically require the investment bank to reimburse the entity for any dividends paid on the loaned shares. Typically, the arrangement precludes the investment bank from voting on any matters submitted to a vote of the entity's shareholders to the extent the investment bank is the owner of the shares. ### Cash Conversion ##### [470-20-05-13](https://asc.understandingaccounting.org/asc/470/20/#470-20-05-13) Pending content: no Source downloaded (UTC): 2026-09-10T00:31:09.755Z to 2026-09-10T00:31:09.755Z Record version: sha256:b1693eea84557c170bd76b86b9bfa83148855adda437fa0ab4c82aae277d7ae5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/).