ASC

ASC Topic 480

Distinguishing Liabilities from Equity

IntermediateDebt and equityFinancial instrumentsPresentationSubsequent measurement1 subtopics · 148 paragraphs

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ASC 480 governs when an issuer must classify a freestanding financial instrument with characteristics of both liabilities and equity as a liability (or asset) instead of equity. Three classes are captured: mandatorily redeemable financial instruments (480-10-25-4), obligations other than outstanding shares to repurchase the issuer's own shares by transferring assets—forwards, written puts, warrants on puttable shares (480-10-25-8), and obligations settleable in a variable number of shares whose monetary value is fixed, indexed to something other than the issuer's shares, or varies inversely with the share price (480-10-25-14). Measurement is generally fair value (480-10-30-1), except mandatorily redeemable instruments and physically settled fixed-share forward purchase contracts, which are accreted to the settlement amount with the change recognized as interest cost (480-10-35-3, 45-3). The key idea is that instruments in scope are presented as liabilities or assets—never in a "mezzanine" between liabilities and equity (480-10-45-1)—and shares to be redeemed are excluded from EPS (480-10-45-4).

freestanding financial instrumentmandatorily redeemable financial instrumentconditionally redeemable instrument reassessmentobligation to repurchase own equity sharesvariable number of shares with fixed monetary valueaccretion to settlement amount as interest costliability versus equity classificationshares subject to mandatory redemption

Subtopics

  1. 10Overall148 ¶

    ASC 480-10 tells an issuer when a freestanding financial instrument with characteristics of both liabilities and equity must be classified as a liability (or, in some cases, an asset) rather than equity. It captures three classes of instruments: (1) mandatorily redeemable financial instruments (480-10-25-4); (2) obligations, other than outstanding shares, to repurchase the issuer's own equity shares by transferring assets (480-10-25-8); and (3) certain obligations settleable in a variable number of shares whose monetary value is fixed, indexed to something other than the issuer's shares, or varies inversely with the issuer's share price (480-10-25-14). Measurement is generally fair value, except that mandatorily redeemable instruments and physically settled fixed-share forward purchase contracts are accreted to the settlement amount with the change recognized as interest cost.

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