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.

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.

4 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.

5 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 Interaction With Embedded Derivative Requirements in ASC 815-15 Interaction With Accounting Requirements for Own- Equity Contracts in ASC 815-40

6 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

7 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 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

8 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

9 Example Other Contracts Reassessment 96viiiDeloitte | A Roadmap to Distinguishing 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

10 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 Contracts Financial Instruments With Contingent Obligation Outstanding Shares Instruments Other Than Outstanding