The following table identifies the changes made to this Subtopic.
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.
The guidance in this Subtopic applies to all entities
that issue a registration payment arrangement. The guidance in this Subtopic applies to the following transactions and activities:
- 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.
The guidance in this Subtopic does not apply to any of the following:
- 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. - b
Arrangements in which the amount of consideration transferred is determined by reference to either of the following:
- 1
An observable market other than the market for the issuer's stock
- 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. - 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).
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.
The following Cases illustrate the application of this Subtopic to a
registration payment arrangement within the scope of this Subtopic:
- a
Transfer of consideration is not probable at inception (Case A).
- b
Transfer of consideration is probable at inception (Case B).
Cases A and B share all of the following assumptions:
- 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.
- 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
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
Once the registration statement is effective, maintain its effectiveness for three years.
- 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.
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.
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.
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.
This Example illustrates the application of this Subtopic to debt issued subject to a registration payment arrangement within the scope of this Subtopic.
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.
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.
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.
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.