ASC

ASC 825-20

Registration Payment Arrangements

825 Financial Instruments

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In brief

IntermediateRecognitionInitial measurementSubsequent measurementDisclosure

ASC 825-20 governs registration payment arrangements — agreements in which an issuer must file/obtain effectiveness of a registration statement (or obtain/maintain a stock exchange listing) for financial instruments and must transfer cash or shares to the counterparty if it fails. The core rule is that the arrangement is a separate unit of account: the underlying financial instruments are recognized and measured under other GAAP (e.g., 815-10, 815-40, 835-30) ignoring the contingent obligation, while the contingent obligation itself is recognized and measured under the loss-contingency model in Subtopic 450-20. Extensive disclosures are required even if payment is remote.

Key points (7)
  • A registration payment arrangement is recognized and measured as a separate unit of account from the financial instrument(s) subject to it (825-20-25-1; 825-20-30-1).
  • The underlying financial instruments are accounted for under other applicable GAAP (for example, Subtopics 815-10, 815-40, 835-30) without regard to the contingent obligation, so the arrangement does not affect equity-versus-liability classification of warrants (825-20-25-2; 825-20-30-2; 825-20-55-5).
  • The contingent obligation to pay cash or transfer consideration is recognized and measured under Subtopic 450-20 (probable and reasonably estimable), and when a range exists with no better estimate, the minimum of the range is accrued (825-20-25-3; 825-20-30-3; 825-20-55-5).
  • If transfer of consideration is probable and reasonably estimable at inception, the contingent liability is included in the allocation of financing proceeds, with remaining proceeds allocated to the instruments issued under other GAAP — possibly creating a discount (825-20-30-4; 825-20-55-8).
  • Where shares must be delivered, transfer is probable, and the number of shares can be reasonably estimated, the issuer's share price at the reporting date is used to measure the liability (825-20-30-5).
  • Initial recognition after inception, and subsequent increases or decreases in the previously recognized contingent liability, are recognized in earnings (825-20-35-1).
  • Required disclosures include the nature and term of the arrangement, settlement alternatives and who controls them, maximum undiscounted potential consideration (or that there is no limit), carrying amount of the liability, and income statement classification of related gains or losses — even if payment is remote (825-20-50-1; 825-20-50-2).

For students. The exam trap is thinking that a registration payment penalty taints the classification of the related warrants or shares — it does not; the arrangement is bifurcated as its own unit of account and accounted for as an ASC 450-20 loss contingency. Also remember the scope exclusions (conversion-ratio adjustments, non-stock market/index-referenced consideration, and instruments settled when consideration is transferred) and that disclosure is required even when payment is remote.

registration payment arrangementseparate unit of accountcontingent liabilityloss contingency accrualliquidated damagesallocation of proceedswarrant classificationeffective registration statement

Machine-generated study aid for ASC 825-20. Check the source paragraphs below.

825-20-00Status

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825-20-05Overview and Background

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825-20-05-1
An entity may issue financial instruments (for example, equity shares, warrants, or debt instruments) that are subject to a registration payment arrangement. This Subtopic provides guidance related to such arrangements.

825-20-15Scope and Scope Exceptions

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Entities

825-20-15-1
The guidance in this Subtopic applies to all entities that issue a registration payment arrangement.

Transactions

825-20-15-2
The guidance in this Subtopic applies to the following transactions and activities:
  1. a
    A registration payment arrangement regardless of whether it is issued as a separate agreement or included as a provision of a financial instrument or other agreement. An arrangement that requires the issuer to obtain and/or maintain a listing on a stock exchange, instead of, or in addition to, obtaining and/or maintaining an effective registration statement, is within the scope of this Subtopic if the remaining characteristics of the definition of the term registration payment arrangement are met.
825-20-15-4
The guidance in this Subtopic does not apply to any of the following:
  1. a
    Arrangements that require registration or listing of convertible debt instruments or convertible preferred stock if the form of consideration that would be transferred to the counterparty is an adjustment to the conversion ratio. See Subtopic 470-20 on debt with conversion and other options or Subtopic 505-10 on equity for related guidance.
  2. b
    Arrangements in which the amount of consideration transferred is determined by reference to either of the following:
    1. 1
      An observable market other than the market for the issuer's stock
    2. 2
      An observable index.
    For example, if the consideration to be transferred if the issuer is unable to obtain an effective registration statement is determined by reference to the price of a commodity. See Subtopic 815-15 for related guidance.
  3. c
    Arrangements in which the financial instrument or instruments subject to the arrangement are settled when the consideration is transferred (for example, a warrant that is contingently puttable if an effective registration statement for the resale of the equity shares that are issuable upon exercise of the warrant is not declared effective by the SEC within a specified grace period).
825-20-15-5
The guidance in this Subtopic shall not be applied by analogy to the accounting for contracts that are not registration payment arrangements meeting the criteria in paragraphs
825-20-15-2 through 15-3
. For example, a building contract that includes a provision requiring the contractor to obtain a certificate of occupancy by a certain date or pay a penalty every month until the certificate of occupancy is obtained is not addressed by this Subtopic.

825-20-25Recognition

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825-20-25-1
An entity shall recognize a registration payment arrangement as a separate unit of account from the financial instrument(s) subject to that arrangement.
825-20-25-2
The financial instrument(s) subject to the registration payment arrangement shall be recognized in accordance with other applicable generally accepted accounting principles (GAAP) (for example, Subtopics 815-10; 815-40; and 835-30) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.
825-20-25-3
The contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement shall be recognized separately in accordance with Subtopic 450-20.

825-20-30Initial Measurement

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825-20-30-1
An entity shall measure a registration payment arrangement as a separate unit of account from the financial instrument(s) subject to that arrangement.
825-20-30-2
The financial instrument(s) subject to the registration payment arrangement shall be measured in accordance with other applicable generally accepted accounting principles (GAAP) (for example, Subtopics 815-10; 815-40; and 835-30) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.
825-20-30-3
The contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement shall be measured separately in accordance with Subtopic 450-20.
825-20-30-4
If the transfer of consideration under a registration payment arrangement is probable and can be reasonably estimated at inception, the contingent liability under the registration payment arrangement shall be included in the allocation of proceeds from the related financing transaction using the measurement guidance in Subtopic 450-20. The remaining proceeds shall be allocated to the financial instrument(s) issued in conjunction with the registration payment arrangement based on the provisions of other applicable GAAP. A financial instrument issued concurrently with a registration payment arrangement might be initially measured at a discount to its principal amount under this allocation methodology. For example, if the financial instruments issued concurrently with the registration payment arrangement are a debt instrument and an equity-classified warrant, the remaining proceeds after recognizing and measuring a liability for the registration payment arrangement under that Subtopic would be allocated on a relative fair value basis between the debt and the warrant pursuant to paragraph 470-20-25-3.
825-20-30-5
If all of the following criteria are met, the issuer's share price at the reporting date shall be used to measure the contingent liability under Subtopic 450-20:
  1. a
    An entity would be required to deliver shares under a registration payment arrangement.
  2. b
    The transfer of that consideration is probable.
  3. c
    The number of shares to be delivered can be reasonably estimated.

825-20-35Subsequent Measurement

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825-20-35-1
If the transfer of consideration under a registration payment arrangement becomes probable and can be reasonably estimated after the inception of the arrangement or if the measurement of a previously recognized contingent liability increases or decreases in a subsequent period, the initial recognition of the contingent liability or the change in the measurement of the previously recognized contingent liability (in accordance with Subtopic 450-20) shall be recognized in earnings.

825-20-50Disclosure

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825-20-50-1
The issuer of a registration payment arrangement shall disclose all of the following information about each registration payment arrangement or each group of similar arrangements:
  1. a
    The nature of the registration payment arrangement, including all of the following:
    1. 1
      The approximate term of the arrangement
    2. 2
      The financial instrument(s) subject to the arrangement
    3. 3
      The events or circumstances that would require the issuer to transfer consideration under the arrangement.
  2. b
    Any settlement alternatives contained in the terms of the registration payment arrangement, including the party that controls the settlement alternatives
  3. c
    The maximum potential amount of consideration, undiscounted, that the issuer could be required to transfer under the registration payment arrangement (including the maximum number of shares that may be required to be issued)
  4. d
    If the terms of the arrangement provide for no limitation to the maximum potential consideration (including shares) to be transferred, that fact shall be disclosed
  5. e
    The current carrying amount of the liability representing the issuer's obligations under the registration payment arrangement
  6. f
    The income statement classification of any gains or losses resulting from changes in the carrying amount of the liability representing the issuer's obligations under the registration payment arrangement.
825-20-50-2
These disclosures are incremental to the disclosures that may be required under other applicable generally accepted accounting principles (GAAP) and are required even if the likelihood of the issuer having to make any payments under the arrangement is remote.

825-20-55Implementation Guidance and Illustrations

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Illustrations

825-20-55-1
The following Cases illustrate the application of this Subtopic to a registration payment arrangement within the scope of this Subtopic:
  1. a
    Transfer of consideration is not probable at inception (Case A).
  2. b
    Transfer of consideration is probable at inception (Case B).
825-20-55-2
Cases A and B share all of the following assumptions:
  1. a
    Entity A issues 10 million shares of common stock and 2 million freestanding warrants to purchase additional shares of common stock for total proceeds of $100 million in a private placement transaction.
  2. b
    In connection with the offering, Entity A enters into a registration payment arrangement that requires Entity A to use its best efforts to do both of the following:
    1. 1
      File a registration statement with the Securities and Exchange Commission (SEC) for the resale of 12 million shares of common stock. That registration statement must be declared effective within 180 days of the offering's closing date
    2. 2
      Once the registration statement is effective, maintain its effectiveness for three years.
  3. c
    If the registration statement is not declared effective within 180 days, or if it ceases to be effective during the 3-year period in which Entity A is required to maintain its effectiveness, the investors are entitled to liquidated damages in the form of monthly cash payments computed as 1.5 percent per month of the $100 million total offering proceeds.
825-20-55-3
At closing, Entity A concludes that it is not probable that it will be required to remit any payments to the investors for failing to obtain an effective registration statement or failing to maintain its effectiveness.
825-20-55-4
Entity A files a registration statement for the resale of the shares that is declared effective within the 180-day grace period. One year after the effective date of the registration statement, circumstances have changed such that Entity A concludes that it is probable that the effectiveness of the registration statement will not be maintained for some portion of the remaining two-year period. Although Entity A is unable to estimate the exact amount of time that the registration statement will cease to be effective, its reasonable estimate at the reporting date is a period of time ranging between 9 and 18 months. Accordingly, the range of loss is between $13.5 million ($100 million × 1.5 percent × 9 months) and $27 million ($100 million × 1.5 percent × 18 months). At the reporting date, no amount within that range appears to be a better estimate than any other amount.
825-20-55-5
The common stock and warrants subject to the registration payment arrangement must be recognized and measured in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to make payments pursuant to the registration payment arrangement. Therefore, that contingent obligation does not affect Entity A's analysis of whether the warrants are classified as liabilities or equity instruments under Subtopic 815-40, regardless of whether the transfer of consideration under the registration payment arrangement is probable. In the period in which it became probable that Entity A will be required to remit payments to the investors for failing to maintain an effective registration statement and a range of payments can be reasonably estimated, a contingent liability should be accrued by a charge to earnings. Because no amount within the range of payments is a better estimate than any other amount, the $13.5 million minimum amount in the range should be accrued.
825-20-55-6
In this Case, at closing, Entity A concludes that it is probable that it will be required to remit payments to the investors for failing to obtain an effective registration statement within the 180-day grace period.
825-20-55-7
Based on the relevant facts and circumstances, Entity A can reasonably estimate both of the following:
  1. a
    The registration statement will become effective six months after the grace period expires.
  2. b
    Once effective, registration will be maintained for the three-year required period of effectiveness.
825-20-55-8
The common stock and warrants subject to the registration payment arrangement must be recognized and measured in accordance with other applicable GAAP without regard to the contingent obligation to make payments pursuant to the registration payment arrangement. Therefore, that contingent obligation does not affect Entity A's analysis of whether the warrants are classified as liabilities or equity instruments under Subtopic 815-40, regardless of whether the transfer of consideration under the registration payment arrangement is probable. Because a transfer of consideration under the registration payment arrangement is probable and can be reasonably estimated at inception, the $9 million ($100 million × 1.5 percent × 6 months) contingent liability under the registration payment arrangement must be included in the allocation of proceeds from the offering. The $91 million of remaining proceeds should be allocated between the common stock and warrants based on the guidance in other applicable GAAP.
825-20-55-9
This Example illustrates the application of this Subtopic to debt issued subject to a registration payment arrangement within the scope of this Subtopic.
825-20-55-10
Entity A issues notes with an aggregate principal amount of $100 million in a private placement transaction. The notes were issued at par, bear interest at 8 percent per annum, and are not convertible into equity shares of the issuer.
825-20-55-11
In connection with the offering, Entity A enters into a registration payment arrangement that requires Entity A to use its best efforts to do both of the following:
  1. a
    File a registration statement with the SEC for the resale of the notes. That registration statement must be declared effective within 180 days of the offering's closing date
  2. b
    Once the registration statement is effective, maintain its effectiveness for two years.
825-20-55-12
If the registration statement is not declared effective within 180 days, or if it ceases to be effective during the 2-year period in which Entity A is required to maintain its effectiveness, the investors are entitled to liquidated damages in the form of an increase to the interest coupon of 50 basis points per month. At closing, Entity A concludes that it is not probable that it will be required to remit any payments to the investors for failing to obtain an effective registration statement or failing to maintain its effectiveness.
825-20-55-13
Entity A files a registration statement for the resale of the notes that is declared effective within the 180-day grace period. One year after the effective date of the registration statement, circumstances have changed such that Entity A concludes that it is probable that the effectiveness of the registration statement will not be maintained for some portion of the remaining one-year period. Although Entity A is unable to estimate the exact amount of time that the registration statement will cease to be effective, its reasonable estimate at the reporting date is a period of time ranging between three and six months. Accordingly, the range of loss is between $1.5 million ($100 million × 0.5 percent × 3 months) and $3 million ($100 million × 0.5 percent × 6 months). At the reporting date, no amount within that range appears to be a better estimate than any other amount.
825-20-55-14
In the period in which it became probable that Entity A will be required to remit payments to the investors for failing to maintain an effective registration statement and a range of payments can be reasonably estimated, a contingent liability should be accrued by a charge to earnings. Because no amount within the range of payments is a better estimate than any other amount, the $1.5 million minimum amount in the range should be accrued.

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