An example of a convertible preferred stock that paragraph
470-20-15-2D requires an entity consider as a convertible debt instrument for purposes of the scope application of this Subtopic
is a convertible preferred stock that has a stated redemption date and also would require the issuer to settle the face amount of the instrument in cash upon exercise of the conversion option.Such a convertible preferred stock is a mandatorily redeemable financial instrument and is classified as a liability under Subtopic 480-10 because it embodies an unconditional obligation to redeem the instrument by transferring assets at a specified or determinable date (or dates).The following Cases illustrate application of the guidance in paragraph
470-20-40-16 to induced conversions of convertible securities:
- a
Reduced conversion price for conversion before determination date, increase in bond
fair value (Case A)
- b
Reduced conversion price for conversion before determination date, decrease in bond fair value (Case B).
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4The Cases
in paragraphs illustrate application of the guidance in paragraph
470-20-40-16for measuring an expense when a convertible debt instrument is converted pursuant to an inducement offer:- a
Reduced conversion price for conversion, increase in bond
fair value (Case A)
- b
Reduced conversion price for conversion, decrease in bond fair value (Case B).
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4The Cases in paragraphs illustrate application of the guidance in paragraphs 470-20-40-13(b) and 470-20-40-13A for determining whether an inducement offer 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:- a
Offer to settle convertible debt instrument in cash and warrants (Case C)
- b
Offer to settle convertible debt instrument in cash and shares (Case D)
- c
Offer to settle convertible debt instrument in shares and warrants (Case E).
For simplicity, the face amount of each security is assumed to be equal to its carrying amount in the financial statements (that is, no original issue premium or discount exists).
On January 1, 19X4, Entity A issues a $1,000 face amount 10 percent convertible bond maturing December 31, 20X3. The carrying amount of the bond in the financial statements of Entity A is $1,000, and it is convertible into common shares of Entity A at a conversion price of $25 per share. On January 1, 19X6, the convertible bond has a fair value of $1,700. To induce convertible bondholders to convert their bonds promptly, Entity A reduces the conversion price to $20 for bondholders that convert before February 29, 19X6 (within 60 days).
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4| Editor's Note: The heading that precedes paragraph 470-20-55-3 will be amended upon transition as shown below. The content of the paragraph will not change. |
| • • > Case A: Reduced Conversion Price, Increase in Bond Fair Value |
On January 1, 19X4, Entity A issues a $1,000 face amount 10 percent convertible bond maturing December 31, 20X3. The carrying amount of the bond in the financial statements of Entity A is $1,000, and it is convertible into common shares of Entity A at a conversion price of $25 per share. On January 1, 19X6, the convertible bond has a fair value of $1,700. To induce convertible bondholders to convert their bonds promptly, Entity A reduces the conversion price to $20 for bondholders that convert before February 29, 19X6 (within 60 days). Assuming the market price of Entity A's common stock on the date of conversion is $40 per share, the fair value of the incremental consideration paid by Entity A upon conversion is calculated as follows for each $1,000 bond that is converted before February 29, 19X6. ![](\"/asc-img/GUID-F31E429A-9446-48B5-8D55-12C4450F03B3-low.gif\")
Value of securities issued (a) \" $2,000 \" Value of securities issuable pursuant to original conversion privileges (b) \" 1,600 \" Fair value of incremental consideration $400 (a) Value of securities issued to debt holders is computed as follows: Face amount \" $1,000 \" ÷ New conversion price ÷ $20 per share Number of common shares issued upon conversion 50 shares × Price per common share × $40 per share Value of securities issued \" $2,000 \" (b) Value of securities issuable pursuant to original conversion privileges is computed as follows: Face amount \" $1,000 \" ÷ Original conversion price ÷ $25 per share Number of common shares issuable pursuant to original conversion privileges 40 shares × Price per common share × $40 per share Value of securities issuable pursuant to original conversion privileges \" $1,600 \"
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4Assuming the market price of Entity A's common stock on the date the inducement offer was accepted is $40 per share, the fair value of the incremental consideration that will be paid by Entity A is calculated as follows for each $1,000 bond that is converted before February 29, 19X6. Therefore, Entity A records debt conversion expense equal to the fair value of the incremental consideration paid as follows. ![](\"/asc-img/GUID-D1F33C6C-85DE-48DF-A9D2-38F28478130F-low.gif\")
Debit Credit Convertible debt \" $1,000 \" Debt conversion expense 400 Common stock \" $1,400 \"
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4Entity A concludes that it meets all of the criteria in paragraph 470-20-40-13. Therefore, upon conversion, Entity A records debt conversion expense equal to the fair value of the incremental consideration paid as follows. On January 1, 19X1, Entity B issues a $1,000 face amount 4 percent convertible bond maturing December 31, 20X0. The carrying amount of the bond in the financial statements of Entity B is $1,000, and it is convertible into common shares of Entity B at a conversion price of $25. On June 1, 19X4, the convertible bond has a fair value of $500. To induce convertible bondholders to convert their bonds promptly, Entity B reduces the conversion price to $20 for bondholders that convert before July 1, 19X4 (within 30 days).
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4| Editor's Note: The heading that precedes paragraph 470-20-55-6 will be amended upon transition as shown below. The content of the paragraph will not change. |
| • • > Case B: Reduced Conversion Price, Decrease in Bond Fair Value |
On January 1, 19X1, Entity B issues a $1,000 face amount 4 percent convertible bond maturing December 31, 20X0. The carrying amount of the bond in the financial statements of Entity B is $1,000, and it is convertible into common shares of Entity B at a conversion price of $25. On June 1, 19X4, the convertible bond has a fair value of $500. To induce convertible bondholders to convert their bonds promptly, Entity B reduces the conversion price to $20 for bondholders that convert before July 1, 19X4 (within 30 days). Assuming the market price of Entity B's common stock on the date of conversion is $12 per share, the fair value of the incremental consideration paid by Entity B upon conversion is calculated as follows for each $1,000 bond that is converted before July 1, 19X4. ![](\"/asc-img/GUID-C7B2869B-40D4-4FD3-99A7-AEAFEE474EF0-low.gif\")
Value of securities issued (a) $600 Value of securities issuable pursuant to original conversion privileges (b) 480 Fair value of incremental consideration $120 (a) Value of securities issued to debt holders is computed as follows: Face amount \" $1,000 \" ÷ New conversion price ÷ $20 per share Number of common shares issued upon conversion 50 shares × Price per common share × $12 per share Value of securities issued $600 (b) Value of securities issuable pursuant to original conversion privileges is computed as follows: Face amount \" $1,000 \" ÷ Original conversion price ÷ $25 per share Number of common shares issuable pursuant to original conversion privileges 40 shares × Price per common share × $12 per share Value of securities issuable pursuant to original conversion privileges $480
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4Assuming the market price of Entity B's common stock on the date the inducement offer was accepted is $12 per share, the fair value of the incremental consideration that will be paid by Entity B is calculated as follows for each $1,000 bond that is converted before July 1, 19X4. (P) December 16, 2025; (N) December 16, 2025
470-20-65-4Entity B is required to assess whether the criteria in paragraph 470-20-40-13 are met, including whether the conversion feature is substantive (in accordance with the guidance in paragraphs ) as of both the time of issuance and the date the inducement offer is accepted by the convertible debt holder. If Entity B concludes that, on the basis of its facts and circumstances, all of the criteria in paragraph 470-20-40-13 are met, then it would account for the transaction as illustrated in paragraph 470-20-55-8. If Entity B determines that the criteria in paragraph 470-20-40-13 are not met, it should not account for the settlement transaction as an induced conversion.Therefore, Entity B records debt conversion expense equal to the fair value of the incremental consideration paid as follows. ![](\"/asc-img/GUID-64AA99F2-6D0D-4B0E-9191-736F8BB2D9F1-low.gif\")
Debit Credit Convertible debt \" $1,000 \" Debt conversion expense 120 Common stock \" $1,120 \"
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4If Entity B determines that the criteria in paragraph 470-20-40-13 are met, upon conversion, Entity B would record debt conversion expense equal to the fair value of the incremental consideration paid as follows. (P) December 16, 2025; (N) December 16, 2025
470-20-65-4On January 1, 2X24, Entity A issues a $1,000 face amount 10 percent convertible bond maturing December 31, 2X33. The bond has a conversion price of $25 per share. The terms of the existing instrument require that, upon conversion, the issuer settle the principal in cash and the conversion premium in any combination of cash and shares. Under the existing conversion privileges, the total amount of cash (or the total value of the cash and shares) required to be issued upon conversion equals the product of 40 shares per $1,000 bond and a volume-weighted average price of Entity A’s common stock. The volume-weighted average price is calculated over a period of 40 days beginning the day after the holder notifies the issuer that it will convert the debt instrument. On May 15, 2X27, to induce convertible bondholders to convert their bonds promptly, Entity A offers the following consideration in exchange for each $1,000 bond that is converted within 60 days (for purposes of this Example, assume the offer meets the other criteria in paragraph 470-20-40-13 and that the offer is accepted by bondholders on June 1, 2X27):- a
A cash payment equal to 40 shares multiplied by the volume-weighted average price of Entity A’s common stock calculated over a period of 15 days (beginning the day after the holder accepts the inducement offer)
- b
Five warrants (offered as a sweetener). Each warrant enables the holder to acquire a share of Entity A’s common stock at a fixed exercise price of $40. The warrants are exercisable upon issuance and expire five years after issuance.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4Assume that the fair value of Entity A’s common stock on the date the inducement offer was accepted (June 1, 2X27) is $40 per share. To evaluate whether the inducement offer meets the criterion in paragraph 470-20-40-13(b), Entity A would compare the form and amount of consideration offered with the form and amount of consideration that would be issued upon conversion pursuant to the terms of the existing instrument. The conversion privileges in the existing instrument require Entity A to settle the principal in cash and permit Entity A to settle the conversion premium in any combination of cash and shares.(P) December 16, 2025; (N) December 16, 2025
470-20-65-4In this Case, the inducement offer includes the form (entirely cash) and amount ($1,600) of consideration required to settle both the principal ($1,000) and the conversion premium ($600) pursuant to the conversion privileges provided in the terms of the existing debt instrument. The amount of $1,600 is the product of 40 shares and the fair value of Entity A’s shares at the offer acceptance date ($40).(P) December 16, 2025; (N) December 16, 2025
470-20-65-4The offer of warrants to induce conversion does not affect the assessment of whether the inducement offer includes the form and amount of consideration issuable under the existing conversion privileges because the existing conversion privileges did not provide for the issuance of warrants (however, the offer of warrants as a sweetener affects the measurement of the debt conversion expense recognized in accordance with paragraph 470-20-40-16). Similarly, the fact that the inducement offer changes the number of days over which the volume-weighted average price of Entity A’s shares is measured does not affect whether the inducement offer includes the amount of consideration issuable under the existing conversion privileges because Entity A would use the fair value of its common stock as of the offer acceptance date to calculate the amount of cash payable under both the conversion privileges in the existing instrument and the inducement offer in accordance with paragraph 470-20-40-13A(a). Therefore, the inducement offer satisfies the criterion in paragraph 470-20-40-13(b).![](\"/asc-img/GUID-5697D545-6CE4-4431-8579-C024AE25B181-low.gif\")
Consideration Issuable Pursuant to Existing Conversion Privileges Principal Cash \" $1,000 \" Conversion premium \"Any combination of cash and shares with a total value of $600. If $600 of the conversion premium is settled in cash, then the conversion premium would be settled as follows:\" Cash and $600 Shares (a) 0 shares Consideration Issuable Pursuant to Inducement Offer Cash and \" $1,600 \" Warrants 5 warrants (a) Number of shares issuable pursuant to existing conversion privileges is computed as follows: Value of 40 shares (40 shares × $40 per share as of the offer acceptance date) \" $1,600 \" − Face amount − \" $1,000 \" Value of conversion premium $600 Value of conversion premium $600 Amount of conversion premium settled in cash − $600 Value of conversion premium to be settled in shares $0
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4Assume the same facts as in Case C, except that Entity A offers the following consideration (instead of the consideration listed in paragraph 470-20-55-9A):- a
A cash payment of $1,400
- b
Ten shares of Entity A’s common stock.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4To evaluate whether the inducement offer meets the criterion in paragraph 470-20-40-13(b), Entity A would compare the form and amount of consideration offered with the form and amount of consideration that would be issued upon conversion pursuant to the terms of the existing instrument. The conversion privileges in the terms of the existing instrument require Entity A to settle the principal in cash and permit Entity A to settle the conversion premium in any combination of cash and shares. (P) December 16, 2025; (N) December 16, 2025
470-20-65-4In this Case, the inducement offer includes the form (cash) and amount ($1,000) of consideration required to settle the principal pursuant to the conversion privileges provided in the terms of the existing debt instrument. Under the existing conversion privileges, the remaining settlement value of $600 can be settled in any combination of cash and shares. If $400 ($1,400 total cash payment − $1,000 principal) of the conversion premium is settled in cash, then the inducement offer must provide for at least 5 shares ($200 remaining conversion premium ÷ $40 share price) of Entity A’s common stock to provide the same form (cash and shares) and at least the same amount of cash and shares that would have been provided under the conversion privileges of the existing instrument. Because the inducement offer illustrated in Case D includes 10 shares, it would satisfy the criterion in paragraph 470-20-40-13(b). The fact that the inducement offer eliminates the volume-weighted average price formula contained in the existing conversion privileges and instead offers a specified amount of cash and shares does not affect whether the inducement offer includes the amount of consideration issuable under the existing conversion privileges because Entity A would use the fair value of its common stock as of the offer acceptance date to calculate the amount of cash payable and shares issuable under the conversion privileges in the existing instrument in accordance with paragraph 470-20-40-13A(a).![](\"/asc-img/GUID-4035D57C-F631-4721-A2BB-8AE6D9BCAF51-low.gif\")
Consideration Issuable Pursuant to Existing Conversion Privileges Principal Cash \" $1,000 \" Conversion premium \"Any combination of cash and shares with a total value of $600. If $400 of the conversion premium is settled in cash, then the conversion premium would be settled as follows:\" Cash and $400 Shares (a) 5 shares Consideration Issuable Pursuant to Inducement Offer Cash and \" $1,400 \" Shares 10 shares (a) Number of shares issuable pursuant to existing conversion privileges is computed as follows: Value of 40 shares (40 shares × $40 per share as of the offer acceptance date) \" $1,600 \" − Face amount − \" $1,000 \" Value of conversion premium $600 Value of conversion premium $600 Amount of conversion premium settled in cash − $400 Value of conversion premium to be settled in shares $200 Value of conversion premium to be settled in shares $200 ÷ Price per share (as of the offer acceptance date) ÷ $40 Number of shares issued to satisfy conversion premium 5 shares
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4Assume the same facts as in Case C, except that Entity A offers the following consideration (instead of the consideration listed in paragraph 470-20-55-9A):- a
Forty shares of Entity A’s common stock
- b
Five warrants (offered as a sweetener). Each warrant enables the holder to acquire a share of Entity A’s common stock at a fixed exercise price of $40. The warrants are exercisable upon issuance and expire five years after issuance.
(P) December 16, 2025; (N) December 16, 2025
470-20-65-4To evaluate whether the inducement offer meets the criterion in paragraph 470-20-40-13(b), Entity A would compare the form and amount of consideration offered with the form and amount of consideration that would be issued upon conversion pursuant to the terms of the existing instrument. The conversion privileges in the terms of the existing instrument require Entity A to settle the principal in cash and permit Entity A to settle the conversion premium in any combination of cash and shares.(P) December 16, 2025; (N) December 16, 2025
470-20-65-4In contrast to Case C and Case D, the inducement offer does not include the issuance of all the consideration (in form and amount) issuable pursuant to the conversion privileges included in the terms of the existing instrument. The terms of the existing instrument require settlement of the principal amount in cash, but Entity A did not offer cash consideration in the inducement offer. Therefore, Entity A would conclude that the criterion in paragraph 470-20-40-13(b) is not satisfied. This Example illustrates the guidance in paragraph
470-20-25-14.
If the conversion price was described as $1 million divided by the market price of the common stock on the date of the conversion, that is, resetting at the date of conversion, the holder is guaranteed to receive $1 million in value upon conversion and, therefore, the debt instrument would be considered stock-settled debt.
This Example illustrates an instrument subject to the guidance in paragraphs
.
An entity issues a contingently convertible instrument on January 1, 2006, with a market price trigger, a $1,000 par amount, and a maturity date of December 31, 2020. The debt instrument is convertible at the option of the holder if the share price of the issuer exceeds a specified amount. The issuer can call the debt at any time between 2009 and the maturity date of the debt. If the issuer calls the debt, the holder has the option to receive cash for the call amount or a fixed number of shares as specified in the terms of the instrument upon issuance, regardless of whether the market price trigger has been met. In 2010, the issuer calls the debt before the market price trigger being met and the holder elects to receive a fixed number of shares (as specified in the terms of the instrument).
![](\"/asc-img/GUID-D6E3CC14-0373-4779-A51A-DA63DD5B67FF-low.gif\")
Value of securities issued (a) \" $2,000 \" Value of securities issuable pursuant to existing conversion privileges (b) \" 1,600 \" Fair value of incremental consideration $400 (a) Value of securities issued to debt holders is computed as follows: Face amount \" $1,000 \" ÷ New conversion price ÷ $20 per share Number of common shares issued upon conversion 50 shares × Price per common share × $40 per share Value of securities issued \" $2,000 \" (b) Value of securities issuable pursuant to existing conversion privileges is computed as follows: Face amount \" $1,000 \" ÷ Existing conversion price ÷ $25 per share Number of common shares issuable pursuant to existing conversion privileges 40 shares × Price per common share × $40 per share Value of securities issuable pursuant to existing conversion privileges \" $1,600 \"![](\"/asc-img/GUID-C4016606-7A1F-49C1-8260-6AB5DEA4BA05-low.gif\")
![](\"/asc-img/GUID-E72B7729-8AD9-49CE-B7FF-34B242E75ED4-low.gif\")
![](\"/asc-img/GUID-B6DCDEFB-584A-4CCD-8A37-DD1156CEB944-low.gif\")