The following guidance addresses accounting for
the issuance of equity securities to settle a debt instrument (pursuant to the instrument's original conversion terms) that became convertible upon the issuer's exercise of a call option: - a
Substantive conversion feature.
If the debt instrument contained a substantive conversion feature as of time of issuance, the issuance of equity securities shall be accounted for as a contractual conversion. That is, no gain or loss shall be recognized related to the equity securities issued to settle the instrument. - b
No substantive conversion feature.
If the debt instrument did not contain a substantive conversion feature as of time of issuance, the issuance of equity securities shall be accounted for as a debt extinguishment. That is, the fair value of the equity securities issued should be considered a component of the reacquisition price of the debt.
The assessment of whether the conversion feature is substantive may be performed after time of issuance but shall be based only on assumptions, considerations, and marketplace information available as of time of issuance.
For purposes of determining whether a conversion feature is reasonably possible of being exercised, the assessment of the holder's intent is not necessary. Therefore, even if such an instrument included a conversion feature that provided for conversion due solely to the passage of time (for example, the instrument will become convertible at a date before its maturity date), it would be inappropriate to conclude that the conversion feature is substantive. Also, an instrument that became convertible only upon the issuer's exercise of its call option does not possess a substantive conversion feature.
If the terms of conversion of a convertible debt instrument provide that any accrued but unpaid interest at the date of conversion is forfeited by the former debt holder, accrued interest from the last interest payment date, if applicable, to the date of conversion, net of related income tax effects, if any, shall be charged to interest expense and credited to capital as part of the cost of securities issued. Thus, the accrued interest is accounted for in the same way as the principal amount of the debt converted and any unamortized premium, discount, or issuance costs; the net carrying amount of the debt, including any unamortized premium, discount, or issuance costs and the related accrual for interest to the date of conversion, net of any related income tax effects, is a credit to the entity's capital.
The guidance in paragraph 470-20-40-16 applies to conversions of convertible debt to equity securities pursuant to terms that reflect changes made by the debtor to the conversion privileges provided in the terms of the debt at issuance (including changes that involve the payment of consideration) for the purpose of inducing conversion. That guidance applies only to conversions that both: - a
Occur pursuant to changed conversion privileges that are exercisable only for a limited period of time (inducements offered without a restrictive time limit on their exercisability are not, by their structure, changes made to induce prompt conversion)
- b
Include the issuance of all of the equity securities issuable pursuant to conversion privileges included in the terms of the debt at issuance for each debt instrument that is converted, regardless of the party that initiates the offer or whether the offer relates to all debt holders.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4The guidance in paragraph 470-20-40-16 applies to conversions of convertible debt instruments pursuant to terms that reflect changes made by the issuer to the conversion privileges provided in the terms of the existing debt instrument (including changes that involve the payment of consideration) for the purpose of inducing conversion. That guidance applies only to conversions for which all of the following criteria are satisfied:- a
The conversion occurs pursuant to changed conversion privileges that are exercisable only for a limited period of time (inducements offered without a restrictive time limit on their exercisability are not, by their structure, changes made to induce prompt conversion).
- b
The conversion includes the issuance of all of the consideration (in form and amount) issuable pursuant to conversion privileges provided in the terms of the existing debt instrument for each debt instrument that is converted, regardless of the party that initiates the offer or whether the offer relates to all debt holders. See paragraph 470-20-40-13A for additional guidance applicable to debt instruments whose conversion privileges permit the entity to issue cash (or other assets) or a combination of shares and cash (or other assets) upon conversion. The examples in paragraphs illustrate the application of this guidance. - c
The existing debt instrument, regardless of whether it is currently convertible, contained a substantive conversion feature as of both the time of issuance and the date the inducement offer is accepted by the convertible debt holder. See paragraphs for additional guidance on determining whether a conversion feature is substantive.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4In applying the guidance in paragraph 470-20-40-13(b), an entity shall compare the amount of cash (or other assets) and number of shares issuable under the conversion privileges provided in the terms of the existing instrument with the amount of cash (or other assets) and number of shares issuable under the inducement offer. An entity shall consider the following: - a
For purposes of comparing the amount of cash (or other assets) and number of shares issuable, if the settlement terms under either the existing conversion privileges or the inducement offer are based on a future share price or average of future share prices (such as a volume-weighted average price), then an entity shall use the fair value of the shares as of the date the inducement offer is accepted. For example, the incorporation, elimination, or modification of a volume-weighted average price formula that is based on future share prices does not affect the determination of the amount of cash or number of shares issuable for the induced conversion assessment because the fair value of the shares as of the date the inducement offer is accepted would be used instead of the future volume-weighted average price. A future share price refers to a share price measured after the inducement offer is accepted.
- b
Changes that result in the amount of cash (or other assets) and number of shares being indexed to something other than the future price of the issuer’s shares (for example, the fair value of a commodity) shall be considered a change in the form of settlement.
- c
If within the one-year period preceding the date the inducement offer is accepted by the convertible debt holder the existing debt has been exchanged or modified (without being deemed to be substantially different in accordance with the guidance in Subtopic 470-50), then the conversion privileges provided in the debt terms that existed one year before the date the offer is accepted by the convertible debt holder shall be used in place of the conversion privileges provided in the terms of the existing debt instrument.
A conversion includes an exchange of a convertible debt instrument for equity securities or a combination of equity securities and other consideration, whether or not the exchange involves legal exercise of the contractual conversion privileges included in terms of the debt. The preceding paragraph also includes conversions pursuant to amended or altered conversion privileges on such instruments, even though they are literally provided in the terms of the debt at issuance.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4A conversion includes an exchange of a convertible debt instrument for equity securities or other consideration, whether or not the exchange involves legal exercise of the contractual conversion privileges included in terms of the debt. The guidance in paragraphs also applies to conversions pursuant to amended or altered conversion privileges on such instruments, even though the right to amend the terms is provided in the terms of the existing debt instrument.The changed terms may involve any of the following: - a
A reduction of the original conversion price thereby resulting in the issuance of additional shares of stock
- b
An issuance of warrants or other securities not provided for in the original conversion terms
- c
A payment of cash or other consideration to those debt holders that convert during the specified time period.
The guidance in the following paragraph does not apply to conversions pursuant to other changes in conversion privileges or to changes in terms of convertible debt instruments that are different from those described in this paragraph. (P) December 16, 2025; (N) December 16, 2025
470-20-65-4The changed terms may involve any of the following: - a
A reduction of the conversion price thereby resulting in the issuance of additional shares of stock
- b
An issuance of warrants or other securities not provided for in the conversion privileges in the terms of the existing instrument
- c
A payment of cash or other consideration to those debt holders that convert during the specified time period.
The guidance in paragraph 470-20-40-16does not apply to conversions pursuant to other changes in conversion privileges or to changes in terms of convertible debt instruments that are different from those described in this paragraph. If a convertible debt instrument is converted to equity securities of the debtor pursuant to an inducement offer (see paragraph 470-20-40-13), the debtor shall recognize an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms. The fair value of the securities or other consideration shall be measured as of the date the inducement offer is accepted by the convertible debt holder. That date normally will be the date the debt holder converts the convertible debt into equity securities or enters into a binding agreement to do so. Until the debt holder accepts the offer, no exchange has been made between the debtor and the debt holder. Example 1 (see paragraph
470-20-55-1B) illustrates the application of this guidance.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4If a convertible debt instrument is converted pursuant to an inducement offer (see paragraph 470-20-40-13), the issuer shall recognize an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities and other consideration issuable pursuant to the conversion privileges provided in the terms of the existing instrument. The fair value of the securities or other consideration shall be measured as of the date the inducement offer is accepted by the convertible debt holder. That date normally will be the date the debt holder converts the convertible debt or enters into a binding agreement to do so. Until the debt holder accepts the offer, no exchange has been made between the issuer and the debt holder. Example 1 (see paragraph
470-20-55-1B) illustrates the application of this guidance.
The guidance in the preceding paragraph does not require recognition of gain or loss with respect to the shares issuable pursuant to the original conversion privileges of the convertible debt when additional securities or assets are transferred to a debt holder to induce prompt conversion of the debt to equity securities. In a conversion pursuant to original conversion terms, debt is extinguished in exchange for equity pursuant to a preexisting contract that is already recognized in the financial statements, and no gain or loss is recognized upon conversion.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4The guidance in paragraph 470-20-40-16does not require recognition of gain or loss with respect to the shares (or other consideration) issuable pursuant to the conversion privileges provided in the terms of the existing convertible debt instrument when additional securities, instruments, or assets are transferred to a debt holder to induce prompt conversion of the existing debt instrument. In a conversion pursuant to the conversion privileges provided in the terms of the existing instrument, debt is settled in exchange for shares, cash (or other assets), or any combination of shares and cash (or other assets) pursuant to a preexisting contract that is already recognized in the financial statements, and no gain or loss is recognized upon conversion.For additional guidance on modifications
(or exchanges) and extinguishments of convertible debt instruments, see Subtopic
470-50.