14, Accounting for Convertible Debt and Debt Issued With Stock Purchase Warrants. Instrument X 2. What makes convertible debt instruments so complex from an accounting standpoint? For an in-depth discussion of the application of the separation models in ASC 470-20, see Deloitteâs A Roadmap to the Issuerâs Accounting for Convertible Debt. While auditing debt can be simple, sometimes itâs tricky. What are the keys to auditing debt? âWhat is convertible equityâ is a common question among start-up businesses that need additional financing and companies that are at risk of becoming insolvent. Traditionally, the underlying instrument into which the debt is convertible is stock; however, the conversion really could be into any type of financial other than cash, including, among other others, derivative instruments, marketable securities, or other forms of debt. Convertible debt has become an attractive alternative for investors who want to collect interest in the near term but retain the right to convert the debt to equity should the issuerâs share price rise in the future. Particularly, convertible equity, also referred to as convertible security, is debt that doesnât require repayment when it is matured. 3 FASB Statement No. For instance, classification issues can arise when debt covenant violations occur. This complexity creates accounting issues regarding how these financial instruments are classified, measured and presented in financial statements. SEGMENT 1: Grant Casner, Manager with Regulatory & Capital Markets Consulting, Deloitte & Touche LLP 1. Convertible debt is a hybrid instrument evidencing a borrowing that is convertible into some other instrument. 2 APB Opinion No. 150, Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. The capital structures of many corporate entities are quite complex, comprising equity, debt, warrants, options and other instruments. Likewise, some forms of debt (with detachable warrants) have equity characteristics, again leading to classification issues. a. Likewise, many e utilizing convertible debt financing to obtain a lower interest rate on their borrowings. Common convertible instruments seen today: what they are and why they are used? Separating convertible debt into two units of account under the cash conversion accounting model results in the debt being recorded at a discount to the principal amount, and that discount is recognized as incremental non-cash interest expense over the expected life of the convertible debt. a. We are pleased to present the 2020 edition of A Roadmap to Distinguishing Liabilities From Equity.. The proposed amendments also would apply to convertible debt instruments, liability-classified mandatorily redeemable financial instruments, and lease liabilities. Cancellation of Debt Income (CODI) 1. B. This Roadmap provides an overview of the guidance in ASC 480-10 1 as well as insights into and interpretations of how to apply it in practice. Instrument C b. Should the debt be classified as current or noncurrent? convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. CODI Rules in General. instrument at its initial fair value, and allocate the residual proceeds to the debt or equity instrument.