# ASC 815-40-25: Derivatives and Hedging — Contracts in Entity's Own Equity — 25 Recognition Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/40/#25-recognition) 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): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:f15b820da5aa98e8985fc9b61273c0d0772283aff3edba7c8bf7af043abdc827 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-40-25: 25 Recognition [Read section](https://asc.understandingaccounting.org/asc/815/40/#25-recognition) SEC content: no ##### [815-40-25-1](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:e47bff1197c747ddd7f8c2e1f132ccec50f8631d6b13ebf9f084583fc24bdb88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this Section applies for the purpose of determining whether an instrument or embedded feature qualifies for the second part of the scope exception in paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74). The first part of the scope exception in paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) is addressed in Section 815-40-15. The initial balance sheet classification of contracts within the scope of this Subtopic generally is based on the concept that: 1. a Contracts that require [net cash settlement](https://asc.understandingaccounting.org/glossary/n/#net-cash-settlement "The party with a loss delivers to the party with a gain a cash payment equal to the gain, and no shares are exchanged.") are assets or liabilities. 2. b Contracts that require settlement in shares are equity instruments. ##### [815-40-25-2](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:54d8c56317ae9a29f96306d8942b1724a816f46034280a22252d463e142536ca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Further, an entity shall observe both of the following: 1. a If the contract provides the counterparty with a choice of net cash settlement or settlement in shares, this Subtopic assumes net cash settlement. 2. b If the contract provides the entity with a choice of net cash settlement or settlement in shares, this Subtopic assumes settlement in shares. ##### [815-40-25-3](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:ab5c68c1860a35d02eea774fc5d5df4b1b31a10ade2b4a2844e3a5d376c5c793 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Except as noted in the last sentence of this paragraph, the approach discussed in paragraphs [815-40-25-1 through 25-2](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-1) does not apply if settlement alternatives do not have the same economic value attached to them or if one of the settlement alternatives is fixed or contains caps or floors. In those situations, the accounting for the instrument (or combination of instruments) shall be based on the economic substance of the [transaction](https://asc.understandingaccounting.org/glossary/t/#transaction "An external event involving transfer of something of value (future economic benefit) between two (or more) entities. (See FASB Concepts Statement No. 6, Elements of Financial Statements.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9An external event involving transfer of something of value (future economic benefit) between two (or more) entities."). For example, if a [freestanding contract](https://asc.understandingaccounting.org/glossary/f/#freestanding-contract "A freestanding contract is entered into either: Separate and apart from any of the entity's other financial instruments or equity transactions In conjunction with some other transaction and is legally detachable and separately exercisable."), issued together with another instrument, requires that the entity provide to the holder a fixed or guaranteed return such that the instruments are, in substance, debt, the entity shall account for both instruments as liabilities, regardless of the settlement terms of the freestanding contract. However, the approach discussed in paragraphs [815-40-25-1 through 25-2](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-1) does apply to contracts that have settlement alternatives with different economic values if the reason for the difference is a limit on the number of shares that must be delivered by the entity pursuant to a [net share settlement](https://asc.understandingaccounting.org/glossary/n/#net-share-settlement "The party with a loss delivers to the party with a gain shares with a current fair value equal to the gain.") alternative. ##### [815-40-25-4](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:01dc3439d86064e915410cdbf5644e522c38114e8a4580efc452e55953a83879 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accordingly, unless the economic substance indicates otherwise: 1. a Contracts shall be initially classified as either assets or liabilities in both of the following situations: 1. 1 Contracts that require net cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the entity) 2. 2 Contracts that give the counterparty a choice of net cash settlement or settlement in shares ([physical settlement](https://asc.understandingaccounting.org/glossary/p/#physical-settlement "The party designated in the contract as the buyer delivers the full stated amount of cash to the seller, and the seller delivers the full stated number of shares to the buyer.") or net share settlement). 2. b Contracts shall be initially classified as equity in both of the following situations: 1. 1 Contracts that require physical settlement or net share settlement 2. 2 Contracts that give the entity a choice of net cash settlement or settlement in its own shares (physical settlement or net share settlement), assuming that all the criteria set forth in paragraphs [815-40-25-7 through 25-30](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-7) and [815-40-55-2 through 55-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-2) have been met. ##### [815-40-25-5](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:022c4364eb3e99973cb7ef154b7e65a748f2d3723b4468b4cbce370f2f408a69 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-20-55-33](https://asc.understandingaccounting.org/asc/815/20/#815-20-55-33) explains that [derivative instruments](https://asc.understandingaccounting.org/glossary/d/#derivative-instrument "Paragraphs 815-10-15-83815-10-15-84815-10-15-85815-10-15-86815-10-15-87815-10-15-88815-10-15-89815-10-15-90815-10-15-91815-10-15-92815-10-15-93815-10-15-94815-10-15-95815-10-15-96815-10-15-97815-10-15-98815-10-15-99815-10-15-100815-10-15-101815-10-15-102815-10-15-103815-10-15-104815-10-15-105815-10-15-106815-10-15-107815-10-15-108815-10-15-109815-10-15-110815-10-15-111815-10-15-112815-10-15-113815-10-15-114815-10-15-115815-10-15-116815-10-15-117815-10-15-118815-10-15-119815-10-15-120815-10-15-121815-10-15-122815-10-15-123815-10-15-124815-10-15-125815-10-15-126815-10-15-127815-10-15-128815-10-15-129815-10-15-130815-10-15-131815-10-15-132815-10-15-133815-10-15-134815-10-15-135815-10-15-136815-10-15-137815-10-15-138815-10-15-139 define the term derivative instrument.") that are indexed to an entity's own stock and recorded as assets or liabilities can be hedging instruments. ##### [815-40-25-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:7efebbbc0fc9f5be22b9e12d7c1dfcf98447f39d6f21de79ba7a156931a5a4ed Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The remainder of this Section addresses the following matters: 1. a Additional conditions necessary for equity classification 2. b Settlement alternatives that differ in gain and loss positions 3. c Application of additional criteria to convertible debt and other hybrid instruments 4. d Effect of a [registration payment arrangement](https://asc.understandingaccounting.org/glossary/r/#registration-payment-arrangement "An arrangement with both of the following characteristics: It specifies that the issuer will endeavor to do either of the following: File a registration statement for the resale of specified financial instruments and/or for the resale of equity shares that are issuable upon exercise or conversion of specified financial instruments and for that registration statement to be declared effective by the U.S. Securities and Exchange Commission (SEC) (or other applicable securities regulator if the registration statement will be filed in a foreign jurisdiction) within a specified grace period Maintain the effectiveness of the registration statement for a specified period of time (or in perpetuity). It requires the issuer to transfer consideration to the counterparty if the registration statement for the resale of the financial instrument or instruments subject to the arrangement is not declared effective or if effectiveness of the registration statement is not maintained. That consideration may be payable in a lump sum or it may be payable periodically, and the form of the consideration may vary. For example, the consideration may be in the form of cash, equity instruments, or adjustments to the terms of the financial instrument or instruments that are subject to the registration payment arrangement (such as an increased interest rate on a debt instrument)."). #### Additional Conditions Necessary for Equity Classification ##### [815-40-25-7](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:072552568f72e7479ff46128358291270af34c17f23d7ae6b371f27e2485d264 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Contracts that include any provision that could require net cash settlement cannot be accounted for as equity of the entity (that is, asset or liability classification is required for those contracts), except in those limited circumstances in which holders of the underlying shares also would receive cash (as discussed in the following two paragraphs and paragraphs [815-40-55-2 through 55-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-2) ). ##### [815-40-25-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:7af996acdab754a2397f39abedde830e77d04688d52783f0eccee4f3c6773f61 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Generally, if an event that is not within the entity's control could require net cash settlement, then the contract shall be classified as an asset or a liability. However, if the net cash settlement requirement can only be triggered in circumstances in which the holders of the shares underlying the contract also would receive cash, equity classification is not precluded. ##### [815-40-25-9](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:fdceafcc9a4b26f227451120b9c39e16e92c9bb23266037b4a044e551dd12840 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic does not allow for an evaluation of the likelihood that an event would trigger cash settlement (whether net cash or physical), except that if the payment of cash is only required upon the final liquidation of the entity, then that potential outcome need not be considered when applying the guidance in this Subtopic. ##### [815-40-25-10](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:9516410fc239fad0f78f012ab2317628361c8892ba443ea7386ca856c5f5df73 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because any contract provision that could require net cash settlement precludes accounting for a contract as equity of the entity (except for those circumstances in which the holders of the underlying shares would receive cash, as discussed in paragraphs [815-40-25-8 through 25-9](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-8) and paragraphs [815-40-55-2 through 55-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-2) ), all of the following conditions must be met for a contract to be classified as equity: 1. a [Subparagraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). 2. b Entity has sufficient authorized and unissued shares. The entity has sufficient authorized and unissued shares available to settle the contract after considering all other commitments that may require the issuance of stock during the maximum period the derivative instrument could remain outstanding. 3. c Contract contains an explicit share limit. The contract contains an explicit limit on the number of shares to be delivered in a share settlement. 4. d No required cash payment (with the exception of penalty payments) if entity fails to timely file. There is no requirement to net cash settle the contract in the event the entity fails to make timely filings with the Securities and Exchange Commission (SEC). 5. e No cash-settled [top-off](https://asc.understandingaccounting.org/glossary/t/#top-off-provision "See Make-Whole Provision.") or [make-whole provisions](https://asc.understandingaccounting.org/glossary/m/#make-whole-provision "A cash payment to a counterparty if the shares initially delivered upon settlement are subsequently sold by the counterparty and the sales proceeds are insufficient to provide the counterparty with full return of the amount due. While the exact terms of such provisions vary, they generally are intended to reimburse the counterparty for any losses it incurs or to transfer to the entity any gains the counterparty recognizes on the difference between the following: The settlement date value The value received by the counterparty in subsequent sales of the securities within a specified time after the settlement date."). There are no cash settled top-off or make-whole provisions. 6. f [Subparagraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). 7. g [Subparagraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). Paragraphs [815-40-25-39 through 25-42](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39) explain the application of these criteria to convertible debt and other hybrid instruments. ##### [815-40-25-10A](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-10A) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:798d12a5de52d0d64d29573e4df84961764decb22c21b13365e6ee45dc6e8bdf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following conditions are not required to be considered in an entity's evaluation of net cash settlement (that is, if any one of these provisions is in a contract \[or the contract is silent on these points\], they should not preclude equity classification, except as described below): 1. a Whether settlement is required in registered shares, unless the contract explicitly states that an entity must settle in cash if registered shares are unavailable. Requirements to deliver registered shares do not, by themselves, imply that an entity does not have the ability to deliver shares and, thus, do not require a contract that otherwise qualifies as equity to be classified as a liability. 2. b Whether counterparty rights rank higher than shareholder rights. If the provisions of the contract indicate that the counterparty has rights that rank higher than the rights of a shareholder of the stock underlying the contract, this provision does not preclude equity classification. 3. c Whether collateral is required. A provision requiring the entity to post collateral at any time for any reason does not preclude equity classification. ##### [815-40-25-11](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:2392048751c9eab4d5e2343c9dd8fb5be620db7d7f3ea68268b01f487f66e359 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/). ##### [815-40-25-12](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:f2a101256dce278929d58670c7b2e79b0a82d10fac7fae9ffdd056b94ca279c6 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/). ##### [815-40-25-13](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:f213b2becb85ed592bddd5bb68be3864bedecf2f5d196680835e0c3820343995 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/). ##### [815-40-25-14](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:caefb7536c8b998c980eec6a5cbf2958a687b4a274c28df29fcb012b4ca052bb 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/). ##### [815-40-25-15](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:582e03a9abeb3a0734764ee1536cb54af516030452dab5d667776d33622af001 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/). ##### [815-40-25-16](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:1f0aae625e014a9829ef5496544ca91b56bffb3693711f04d41f2218eaba996a 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/). ##### [815-40-25-17](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:e571ff3a9a3a8711c0b858a031f969467c3ec35995cf9b3ac170b79e8987f74e 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/). ##### [815-40-25-18](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:5f9bf1adba67f92b0b13bb16369284daa5afb6cde5ee7703c3457bc050a3c8c7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a settlement alternative includes a penalty that would be avoided by an entity under other settlement alternatives, the uneconomic settlement alternative shall be disregarded in classifying the contract. ##### [815-40-25-19](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:b839d3567e4d679c47f79b94a2921ea57cd75020ab39c5186e933ac2b61fdca8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an entity could be required to obtain shareholder approval to increase the entity's authorized shares to net share or physically settle a contract, share settlement is not controlled by the entity. ##### [815-40-25-20](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:89ce4b2be86ea2f518d2ef5fe6f3b5e8db0bcaf2761b24a6b7b2c5697cefcb3f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accordingly, an entity shall evaluate whether a sufficient number of authorized and unissued shares exists at the classification assessment date to control settlement by delivering shares. In that evaluation, an entity shall compare both of the following amounts: 1. a The number of currently authorized but unissued shares, less the maximum number of shares that could be required to be delivered during the contract period under existing commitments, including any of the following: 1. 1 Outstanding convertible debt that is convertible during the contract period 2. 2 Outstanding stock options that are or will become exercisable during the contract period 3. 3 Other derivative financial instruments indexed to, and potentially settled in, an entity's own stock. 2. b The maximum number of shares that could be required to be delivered under share settlement (either net share or physical) of the contract. ##### [815-40-25-21](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:ec4c026ebae4052b0e1efdd0cc4a07623679a8c0bc423d9c894c5482e1a1fc7c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When evaluating whether there are sufficient authorized and unissued shares available to settle a contract, an entity shall consider the maximum number of shares that could be required to be delivered under a registration payment arrangement to be an existing share commitment, regardless of whether the instrument being evaluated is subject to that registration payment arrangement. ##### [815-40-25-22](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:dcf3a0fbe93acf49c0a2e2b82eb48feeced98266a997a647f8d78ea584dca21f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the amount in paragraph [815-40-25-20(a)](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20) exceeds the amount in paragraph [815-40-25-20(b)](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20) and the other conditions in this Subtopic are met, share settlement is within the control of the entity and the contract shall be classified as a permanent equity instrument. Otherwise, share settlement is not within the control of the entity and asset or liability classification is required. ##### [815-40-25-23](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:a06ab5e94aa737623736971392a2be07c9f77bed1f00d51228e5f09a93eb4b2f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of this calculation, if a contract permits both (a) net share and (b) physical settlement by delivery of shares at the entity's option (both alternatives permit equity classification if the other conditions in this Section are met), the alternative that results in the lesser number of maximum shares shall be included in this calculation. ##### [815-40-25-24](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:ab7944a19b380dacfb97fc33eed93f4d3dab2b34002c9dc6dcb11a0f3641dc5f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a contract is classified as either an asset or a liability because the counterparty has the option to require settlement of the contract in cash, then the maximum number of shares that the counterparty could require to be delivered upon settlement of the contract (whether physical or net share) shall be assumed for purposes of this calculation. ##### [815-40-25-25](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:fe0b8c5d434803fcd2e9d5a814bdbc434ecf31be7c487b2cde5d2f7102d2f4a4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [815-40-25-26](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:a5fcf41498c047cddad4e6a0f9ef90284b48e724b13dbd5c24e3d722c1c20c86 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For certain contracts, the number of shares that could be required to be delivered upon net share settlement is essentially indeterminate. If the number of shares that could be required to be delivered to net share settle the contract is indeterminate, an entity will be unable to conclude that it has sufficient available authorized and unissued shares and, therefore, net share settlement is not within the control of the entity. ##### [815-40-25-27](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:d365f32eadca412a668a0e5fed600a82382161454a3a855e5026f9e720556f1b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a contract limits or caps the number of shares to be delivered upon expiration of the contract to a fixed number, that fixed maximum number can be compared to the available authorized and unissued shares (the available number after considering the maximum number of shares that could be required to be delivered during the contract period under existing commitments as addressed in paragraph [815-40-25-20](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20) and including top-off or make-whole provisions as discussed in paragraph [815-40-25-30](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-30)) to determine if net share settlement is within the control of the entity. A contract termination trigger alone (for example, a provision that requires that the contract will be terminated and settled if the stock price falls below a specified price) does not satisfy this requirement because, in that circumstance, the maximum number of shares deliverable under the contract is not known with certainty unless there is a stated maximum number of shares. ##### [815-40-25-28](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:75035a0b541cfb66d5cb3585b170c743c1a55242b43ef91503af2b8266adaa88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This paragraph addresses a contract structure that caps the number of shares that must be delivered upon net share settlement but would also provide that any contract valued in excess of that capped amount may be delivered to the counterparty in cash or by delivery of shares (at the entity's option) when authorized, unissued shares become available. The structure requires the entity to use its best efforts to authorize sufficient shares to satisfy the obligation. Under the structure, the number of shares specified in the cap is less than the entity's authorized, unissued shares less the number of shares that are part of other commitments (see paragraph [815-40-25-20](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20)). Use of the entity's best efforts to obtain sufficient authorized shares to settle the contract is within the entity's control. If the contract provides that the number of shares required to settle the excess obligation is fixed on the date that net share settlement of the contract occurs, the excess shares need not be considered when determining whether the entity has sufficient, authorized, unissued shares to net share settle the contract pursuant to paragraph [815-40-25-20](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20). However, the contract may provide that the number of shares that must be delivered to settle the excess obligation is equal to a dollar amount that is fixed on the date of net share settlement (which may or may not increase based on a stated interest rate on the obligation) and that the number of shares to be delivered will be based on the market value of the stock at the date the excess amount is settled. In that case, the excess obligation represents stock-settled debt and shall preclude equity classification of the contract (or, if partial net share settlement is permitted under the contract pursuant to paragraph [815-40-35-11](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-11), precludes equity classification of the portion represented by the excess obligation). ##### [815-40-25-29](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:47b383d1a03c8ef8d47fd488ebf2b75055065f3164431a68cfac6283a4d5a7a0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The ability to make timely SEC filings is not within the control of the entity. Accordingly, if a contract permits share settlement but requires net cash settlement in the event that the entity does not make timely filings with the SEC, that contract shall be classified as an asset or a liability. ##### [815-40-25-30](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:ee1e139527d7d789890aed1712a8537a7707065df9c35cb0725392819fcba14f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A top-off or make-whole provision would not preclude equity classification if both of the following conditions exist: 1. a The provision can be net share settled. 2. b The maximum number of shares that could be required to be delivered under the contract (including any top-off or make-whole provisions) is both: 1. 1 Fixed 2. 2 Less than the number of available authorized shares (authorized and unissued shares less the maximum number of shares that could be required to be delivered during the contract period under existing commitments as discussed in paragraph [815-40-25-20](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20)). If those conditions are not met, equity classification is precluded. ##### [815-40-25-31](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:6c27eba5a1e1f37bec8dd3e6acd627332981eb94a1d7afce681b966381f2ed6f 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/). ##### [815-40-25-32](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:d50dbebd1798580128517e816ab9c97388cc052f713f5bc34d0ff787c6a9526a 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/). ##### [815-40-25-33](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:25adf3e9418ca012774213eec290df77f807365a97033648e606ca234fb38fb1 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/). ##### [815-40-25-34](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:626e7e95e9d83c22b4dcd7a1e76636a184e6e014826bcb5afa735ece5dc1b21e 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/). ##### [815-40-25-35](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:2d1f960768db7796640e826636e2b9028daafd5255402b6d53efa21f7d84ffa1 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/). #### Settlement Alternatives Differ in Gain and Loss Positions ##### [815-40-25-36](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:373a2c031948676e2294ad35fb96db5b77402c290e0e152e656d8dd65f3d3172 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance addresses two circumstances in which settlement alternatives differ in gain and loss positions: 1. a Net cash payment required in loss position 2. b Net-stock alternative in loss position. ##### [815-40-25-37](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:29fce467d1dbc02040f0e8356b8c578e5ed9529cd3221b1766e51db09a75f0da Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A contract indexed to, and potentially settled in, an entity's own stock, with multiple settlement alternatives that require the entity to pay net cash when the contract is in a loss position but receive (a) net stock or (b) either net cash or net stock at the entity's option when the contract is in a gain position shall be accounted for as an asset or a liability. ##### [815-40-25-38](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-38) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:d0e7fb006d9fbb0bcd9549976728594f4fb85f1bf9040897ff5c06461ac7eeb5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A contract indexed to, and potentially settled in, an entity's own stock, within the scope of this Subtopic and with multiple settlement alternatives that require the entity to receive net cash when the contract is in a gain position but pay (a) net stock or (b) either net cash or net stock at the entity's option when the contract is in a loss position shall be accounted for as an equity instrument. This guidance does not apply to a contract that is predominantly a purchased option in which the amount of cash that could be received when the contract is in a gain position is significantly larger than the amount that could be paid when the contract is in a loss position because, for example, there is a small contractual limit on the amount of the loss. Those contracts shall be accounted for as assets or liabilities. #### Application of Additional Criteria to Convertible Debt Instruments and Other Hybrid Instruments ##### [815-40-25-39](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:186fb0662bdc95f104ff33174f55dacbc11cc8dccd54bddac6b742c33635bb8b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of evaluating under paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) whether an [embedded derivative](https://asc.understandingaccounting.org/glossary/e/#embedded-derivative "Implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by a contract in a manner similar to a derivative instrument.") indexed to an entity's own stock would be classified in stockholders' equity if freestanding, the requirements of paragraphs [815-40-25-7 through 25-30](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-7) and [815-40-55-2 through 55-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-2) do not apply if the hybrid contract is a convertible debt instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash (at the discretion of the issuer). ##### [815-40-25-40](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-40) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:7b57988b8468f6635a01703ce1deafe3ede6b7a0f6d2f735ebfa3d02149b4cd5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. However, the requirements of paragraphs [815-40-25-7 through 25-30](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-7) and [815-40-55-2 through 55-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-2) do apply if an issuer is evaluating whether any other embedded derivative is an equity instrument and thereby excluded from the scope of Subtopic 815-10. ##### [815-40-25-41](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-41) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:ccc6b5d07fd99d9c436c58e8e5696d828bd7703c873e9c6df16a13f31baee4d7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Instruments that provide the holder with an option to convert into a fixed number of shares (or equivalent amount of cash at the discretion of the issuer) for which the ability to exercise the option is based on the passage of time or a contingent event shall qualify for the exceptions included in paragraph [815-40-25-39](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39). [Standard antidilution provisions](https://asc.understandingaccounting.org/glossary/s/#standard-antidilution-provisions "Standard antidilution provisions are those that result in adjustments to the conversion ratio in the event of an equity restructuring transaction that are designed to maintain the value of the conversion option.") contained in an instrument do not preclude a conclusion that the instrument is convertible into a fixed number of shares. ##### [815-40-25-42](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-42) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:84d11f2754b8496b6d571b0ce2b2fd79bf7055c5bb8d39e46f77c7cf3ed3ced3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Convertible preferred stock with a mandatory redemption date may qualify for the exception included in paragraph [815-40-25-39](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39) if the economic characteristics indicate that the instrument is more akin to debt than equity. An entity shall consider the guidance in paragraph [815-15-25-17](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17) in assessing whether the instrument is more akin to debt or equity. That paragraph explains that, if the preferred stock is more akin to equity than debt, an equity conversion feature would be clearly and closely related to that host instrument. #### Effect of a Registration Payment Arrangement ##### [815-40-25-43](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-43) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:00.143Z to 2026-09-10T01:39:00.143Z Record version: sha256:ac72b7be0cb0ada8b1249e6dbddc63faa570f4d1c0d0d51822740dc0eb006ad4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Subtopic 825-20 requires that an entity recognize and measure a registration payment arrangement (see paragraph [825-20-15-3](https://asc.understandingaccounting.org/asc/825/20/#825-20-15-3)) as a separate unit of account from the [financial instrument(s)](https://asc.understandingaccounting.org/glossary/f/#financial-instrument "Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity. (P) December 16, 2024; (N) December 16, 2025105-10-65-9Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. Some contractual rights (contractual obligations) that are financial instruments may not be recognized in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity.") subject to that arrangement. Accordingly, under that Subtopic (see paragraphs [825-20-25-2](https://asc.understandingaccounting.org/asc/825/20/#825-20-25-2) and [825-20-30-2](https://asc.understandingaccounting.org/asc/825/20/#825-20-30-2)), a financial instrument that is both within the scope of this Subtopic and subject to a registration payment arrangement shall be recognized and measured in accordance with this Subtopic without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.