A Roadmap to Distinguishing Liabilities From Equity - …

1 A Roadmap to Distinguishing Liabilities From EquityMarch 2020iiThe 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. 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.

2 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. 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.

3 Including Industry InsightsSegment ReportingShare-Based Payment AwardsStatement of Cash FlowsivAcknowledgmentsThis Roadmap reflects the thoughts and accumulated experience of members of the financial instruments team in Deloitte s National Office. 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 editorial and production efforts of Teri Asarito, Lynne Campbell, Sandy Cluzet, Geri Driscoll, David Frangione, and Jeanine Pagliaro. vvContentsPreface xiiiContacts xivChapter 1 Overview 1 Chapter 2 Scope Entities Issuers Exempt Entities Instruments Obligations of the Issuer The Concept of an Obligation Economic Compulsion Issuer Discretion to Avoid a Transfer of Assets or Equity Shares Asset-Classified Instruments Embodying Obligations Prepaid Obligations Financial Instruments Freestanding Financial Instruments Legal form of Share or Involves Equity Shares Shares Equity Shares Issuer s Equity Shares Derivatives Interaction With Derivative Accounting Requirements in ASC 815-10

4 Interaction With Embedded Derivative Requirements in ASC 815-15 Interaction With Accounting Requirements for Own- Equity Contracts in ASC 815-40 Application of ASC 480-10 to Freestanding Written Puts and Forward Purchase Contracts Share-Based Payments Convertible Preferred Shares With CCFs Contingent Consideration in a Business Combination Registration Payment Arrangements Guarantee Obligations 32viDeloitte | A Roadmap to Distinguishing Liabilities From Equity (2020) Chapter 3 Contract Analysis Identifying and Evaluating Contractual Terms Nonsubstantive or Minimal Features Overview Examples Mandatorily Redeemable Preferred Shares With a Nonsubstantive Conversion Option Option to Redeem Shares Embedded in a Minimal Host Unit of Account Concept of a Freestanding Financial Instrument Combination Guidance Application Issues and Examples Issuance of Warrants and Put Options Put Option on Noncontrolling Interest Issuance of Shares and Put Options Put Right That Expires Upon Share Transfer Tranche Preferred Stock Agreement Allocation of Proceeds and Issuance Costs Allocation of Proceeds With-and-Without Method Relative Fair Value Method Allocation of Issuance Costs Accelerated Share Repurchase Programs 49 Chapter 4 Mandatorily Redeemable Financial Instruments Classification Overview Legal

5 form of a Share Unconditional Redemption Obligation Transfer of Cash or Other Assets Exceptions Overview Only-Upon-Liquidation Exception Noncontrolling Interest Exception Exception for Certain Instruments of Certain Nonpublic Entities Application Issues Share That Is Both Puttable and Callable Exchangeable Share Redemption Requirement That Is Contingent on the Issuer s Liquidity Preferred Stock With CCFs 66viiContents Accounting Measurement Initial Measurement Subsequent Measurement Embedded Features Preferred Stock With CCF Interest Cost Issuance Costs Reclassifications Ongoing Reassessment Accounting for Reclassifications Equity -for-Debt Exchange 74 Chapter 5 Obligations to Repurchase Shares by Transferring Assets Classification Overview Not an Outstanding Share An Obligation to Repurchase the Issuer s Equity Shares or One That Is indexed to Such an Obligation Requires or May Require the Transfer of Assets Application Issues Obligation to Issue an Instrument That Embodies an Obligation That Requires or May Require a Transfer of Assets Overview Warrant for Puttable Shares That May Require Cash Settlement Contracts on Redeemable Equity Shares That Do Not Require a Transfer of Assets Deemed Liquidation Events Obligations With Settlement Alternatives Issuer Choice Counterparty Choice Summary Financial Instruments That Embody Multiple Obligations Put Warrants Simple Agreement for Future Equity Accounting Forward Contracts That Require Physical Settlement by Repurchase of a fixed Number of Shares for Cash Scope Initial Measurement Subsequent Measurement Example Other Contracts Reassessment 96viiiDeloitte | A Roadmap to Distinguishing

6 Liabilities From Equity (2020) Chapter 6 Certain Variable-Share Obligations Classification Overview Obligation Requires or May Require the Transfer of a Variable Number of Equity Shares Monetary Value fixed Monetary Amount Known at Inception Amount indexed to Something Other Than Own Equity Amount Inversely Related to Own Equity Application Issues Obligations to Deliver a Variable Number of Shares on the Basis of an Average Stock Price Share-Settled Guarantee Obligations Financial Instruments That Embody Dual- indexed Obligations Overview Evaluating Predominance Contract indexed to Issuer s Stock Price and Foreign Exchange Rate Evaluating Predominance Dual- indexed Guarantee Obligation Financial Instruments That Embody Multiple Obligations Overview Warrant With Share-Settleable Put Warrant With Share-Settleable Make-Whole Put Variable-Share Forward Sales

7 Contracts Financial Instruments With Contingent Obligation Outstanding Shares Instruments Other Than Outstanding Shares Obligations With Settlement Alternatives Issuer Choice Counterparty Choice Summary Illustration Financial Instruments That Embody Both Rights and Obligations Accounting Reassessment 122 Chapter 7 Certain Option Combinations Certain Transactions Involving Noncontrolling Interests Scenarios Derivative 2 Options Embedded in Noncontrolling Interest Freestanding Options Illustrations of the Application of ASC 480-10 to Certain Option Combinations 127ixContents Chapter 8 Presentation and Disclosure Presentation Disclosure Entities That Have No Equity -Classified Shares Separate Presentation and Disclosure Difference Between Redemption Price and Book Value Earnings per Share Mandatorily Redeemable Financial Instruments and Physically Settled Forward Contracts to Repurchase Common Stock Other Forward Purchase Contracts and Written Put Options on Common Stock Certain Variable-Share Obligations 142 Chapter 9 The SEC s Guidance on Temporary Equity Sources of Guidance Overview SEC Rules and Policies Regulation S-X ASR 268 CFRP 211 SABs SAB Topic SAB Topic SEC Announcements and Observer Comments Made at EITF Meetings SEC Staff Announcement.

8 Classification and Measurement of Redeemable Securities SEC Observer Comments Sponsor s Balance Sheet Classification of Capital Stock With a Put Option Held by an Employee Stock Ownership Plan Scope Entities SEC Registrants Nonpublic Entities Scope Instruments Equity Instruments Assets and Liabilities Freestanding Equity -Classified Contracts (Other Than Outstanding Shares) Hybrid Equity Instruments and Embedded Derivatives Convertible Debt Instruments Separated Into Liability and Equity Components Equity Instruments Subject to Registration Payment Arrangements Noncontrolling Interests Securities Held by an Employee Stock Ownership Plan Share-Based Payment Arrangements With Employees 156xDeloitte | A Roadmap to Distinguishing Liabilities From Equity (2020) Classification Characteristics That Trigger Temporary- Equity Classification Evaluation of Whether an Event Is Under the Sole Control of the Issuer Redemption Features Triggered by Holder s Death or Disability Special Considerations When the Holder Has the Ability to Control Issuer Decisions Evaluation of Liquidation Provisions Overview Ordinary Liquidation Events Deemed Liquidation Events Limited Exception Applicable to Certain Deemed Liquidation Provisions Convertible Preferred Stock With a Liquidation Provision Upon a Change in Control Features That the Issuer Must or May Settle in Its Equity Shares Features That the Issuer Must or May Settle in Redeemable Instruments Convertible Debt Instruments Separated Into Liability and Equity Components Share-Based Payment Arrangements With Employees Classification of ESOP Shares Within Temporary

9 Equity Outstanding Shares Classification of Unearned ESOP Shares of Leveraged ESOP Measurement Initial Measurement Subsequent Measurement Overview Current Redemption Value Accreted Redemption Value Multiple Redemption Features Limit on Reductions to the Carrying Amount Increasing Rate Preferred Stock Assessment of Whether an Instrument Is Currently Redeemable Assessing Whether It Is Probable That an Instrument Will Become Redeemable Overview Mutually Exclusive Holder Options Holder Option in Instrument With Mandatory Conversion Feature Issuer s Redemption Option Deemed Liquidation Features Recognition of Measurement Changes and Dividends Paid-in-Kind Dividends Bifurcated Embedded Derivatives Convertible Debt With a Separated Equity Component Convertible Preferred Stock With a Separated Equity Component Redeemable Equity Instruments Issued With Other Instruments 203xiContents Noncontrolling Interests Equity Securities Held by ESOPs Share-Based Payment Arrangements EPS Considerations Preferred Stock Common Stock Noncontrolling Interests Noncontrolling Interests in the form of Preferred Stock Noncontrolling Interests in the form of Common Stock Convertible Debt With Separated Equity Component Derecognition Extinguishments Conversions Conversions Pursuant to the Original Terms Induced Conversions Modifications and Exchanges Reclassifications Reclassifications From Temporary Equity Into Permanent Equity Reclassifications From Permanent Equity to Temporary Equity Reclassifications Out of Equity and Into a Liability Deconsolidation of a Subsidiary Presentation and Disclosure Presentation Separate Presentation of Temporary Equity Liability

10 Classification Prohibited Presentation of Shareholder Loans Disclosure 224 Chapter 10 Comparison to IFRS Standards Background Circumstances in Which an Understanding of IFRS Standards May Be Relevant IFRS Guidance Key Differences Redeemable Equity Securities Obligations to Repurchase Shares Forward Purchase Contracts on an Entity s Own Equity Written Put Options on an Entity s Own Equity Obligations to Issue a Variable Number of Equity Shares 233xiiDeloitte | A Roadmap to Distinguishing Liabilities From Equity (2020) Appendix A Overview of Classification and Measurement Requirements in ASC 480-10 234 Appendix B Legacy FASB Guidance Codified in ASC 480-10 236 Appendix C Sources of SEC Guidance on Temporary Equity 237 Appendix D Glossary of Selected Terms 239 Appendix E Titles of Standards and Other Literature 243 Appendix F Abbreviations 2