A Roadmap to Accounting for Contracts on an Entity’s Own ...

1 A Roadmap to Accounting for Contracts on an Entity s Own EquityMarch 2020 The FASB Accounting Standards Codification material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with publication contains general information only and Deloitte is not, by means of this publication, rendering Accounting , business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business.

2 Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this used in this document, Deloitte means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public 2020 Deloitte Development LLC.

3 All rights Publications in Deloitte s Roadmap SeriesBusiness CombinationsBusiness Combinations SEC Reporting ConsiderationsCarve-Out TransactionsComparing IFRS Standards and GAAPC onsolidation Identifying a Controlling Financial InterestContingencies and Loss RecoveriesContracts on an Entity s Own EquityConvertible DebtCurrent Expected Credit LossesDisposals of Long-Lived Assets and Discontinued OperationsDistinguishing Liabilities From EquityEarnings per ShareEnvironmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint VenturesEquity Method Investees SEC Reporting ConsiderationsFair Value Measurements and DisclosuresForeign Currency Transactions and TranslationsIncome TaxesInitial Public OfferingsLeasesNoncontrolling InterestsNon-GAAP Financial MeasuresRevenue RecognitionSEC Comment Letter Considerations, Including Industry InsightsSegment ReportingShare-Based Payment AwardsStatement of Cash FlowsivAcknowledgmentsThis Roadmap reflects the thoughts, contributions, and accumulated experience of members of the financial instruments team in Deloitte s National Office.

4 We are grateful for the contributions of Magnus Orrell, who led the preparation of the Roadmap , as well as Ashley Carpenter and Jonathan Howard, who provided advice and direction. In addition, we acknowledge the contributions of Lynne Campbell, Amy Davidson, Geri Driscoll, and David Frangione in our Production xContacts xiChapter 1 Overview 1 Chapter 2 Scope Freestanding Contracts Indexed to, and Potentially Settled in.

5 The Entity s Own Equity Derivative Instruments Interaction With the Derivative Accounting Requirements Hybrid Contracts and Embedded Features Certain Repurchase Obligations and Variable-Share Contracts Obligations to Repurchase Shares by Transferring Assets Put Warrants Contracts to Issue a Variable Number of Shares Application of ASC 480-10 to Freestanding Written Puts and Forward Purchase Contracts Share-Based Payments Business Combinations Contingent Consideration Lock-Up Options Consolidation Contracts on the Stock of Consolidated Subsidiaries Contracts on the Stock of a Parent or Other Entity That Is Not Consolidated Contracts on the Stock of an Equity Method Investee Certain Option Combinations Involving Noncontrolling Interests Guarantee Contracts Contingently Issuable Contracts Own-Share Lending Arrangements in Connection With Convertible Debt Issuance 32 Chapter 3 contract Analysis Identifying and Evaluating Contractual Terms Document Review Legal Determinations ISDA Standard Documentation 35viDeloitte | A Roadmap to Accounting for Contracts on an Entity s Own Equity (2020)

6 Unit of Account The Concept of a Freestanding contract Combination Guidance Application of the Unit of Account Guidance Examples Contingent Consideration Arrangements With Performance Targets Registration Payment Arrangements Accelerated Share Repurchase Programs 47 Chapter 4 Indexation Guidance Overview Step 1: Evaluate Any Exercise Contingencies The Concept of an Exercise Contingency Effect of Exercise Contingencies on the Classification of a contract Exercise Contingencies Based on the Market for the Issuer s Stock Exercise Contingencies Based on the Issuer s Operations Interaction Between Step 1 and Step 2 Exercise Contingencies: Application Issues and Examples Step 2.

7 Evaluate the Settlement Provisions Effect of Settlement Terms on the Classification of a contract The Concept of a Fixed-for-Fixed Forward or Option on Equity Shares Provisions That Adjust the Settlement Amount Evaluating Explicit Inputs Explicit Inputs: Application Issues and Examples Adjustments Based on the Entity s Stock Price Adjustments Based on the Risk-Free Market Interest Rate Adjustments Based on Dividends Adjustments Based on Cost of Stock Borrow Adjustments Based on Stock Price Volatility Adjustments Based on a Commodity Price Adjustments Based on the Entity s Revenue Adjustments Based on a Percentage of Equity Adjustments Based on Stock Option Exercise Behavior Convertible Preferred Stock Convertible Zero-Coupon Bond Own-Share Lending Arrangements Evaluating Implicit Inputs Overview Evaluating Adjustments

8 Based on an Implicit Input 79viiContents Implicit Inputs: Application Issues and Examples Antidilution Adjustments Down-Round Protection Warrant on Convertible Preferred Stock With Down-Round Protection Adjustment Contingent on the Occurrence or Nonoccurrence of an IPO Merger Adjustments Adjustments Based on the Counterparty s Transaction Costs Adjustments Based on the Entity s Inability to Deliver Registered Shares Adjustments to the Conversion Price of a Convertible Instrument Under a Registration Payment Arrangement Adjustments Based on a Formula or a Table Example of a Make-Whole Provision in Contingent Convertible Debt Contingent

9 Obligation to Settle a contract at a Fixed Monetary Amount Bail-In Provisions Tax Integration of Capped Calls and Convertible Debt Foreign Currency Provisions Uneconomic Settlement Terms Subjective Modification Provisions Right to Settle at Less Than Fair Value Contracts on Convertible Stock With Conversion Price Adjustments 99 Chapter 5 Classification Guidance Overview Settlement Methods Overview Effect of Net Cash Settlement Provisions Permissible Net Cash Settlement Provisions Net Cash Settlement Within the Entity s Control Net Cash Settlement Upon Final Liquidation of the Entity Net Cash Settlement When Holders of Underlying Shares Receive Same Form of Consideration Change-in-Control Clauses Nationalization (Expropriation) Clauses Own-Share Lending Arrangements in Connection With Convertible Debt Issuance Cash Payments Other Than Net Cash Settlements Settlement Alternatives.

10 General Requirements Application to Convertible Securities With Greater-of Redemption Features Application to Certain Freestanding Contracts Application to Certain Embedded Features Settlement Alternatives With Different Economic Value Certain Put Warrants Settlement Alternatives That Differ in Gain and Loss Positions Settlement in Shares Issued by Another Entity Within a Consolidated Group 119viiiDeloitte | A Roadmap to Accounting for Contracts on an Entity s Own Equity (2020) Additional Equity Classification Conditions Overview Condition 1: Settlement Permitted in Unregistered Shares Right to Settle in Unregistered Shares No Further Timely Filing or Registration Requirements No Obligation to Net Cash Settle the contract No Obligation to Deliver Shares Discount on the Value of Unregistered Shares Interaction With the Guidance on Registration Payment Arrangements Condition 2: Entity Has Sufficient Authorized and Unissued Shares Sequencing Considerations Condition 3.