A Roadmap to the Issuer’s Accounting for Debt

A Roadmap to the Issuer's Accounting for Debt

November 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 permission.

This 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 publication.

The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

As 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 us/about for a detailed description of our legal structure.

Copyright ? 2020 Deloitte Development LLC. All rights reserved.

Publications in Deloitte's Roadmap Series

Business Combinations Business Combinations -- SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation -- Identifying a Controlling Financial Interest Contingencies, Loss Recoveries, and Guarantees Contracts on an Entity's Own Equity Convertible Debt Current Expected Credit Losses Distinguishing Liabilities From Equity Debt Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees -- SEC Reporting Considerations Fair Value Measurements and Disclosures (Including the Fair Value Option) Foreign Currency Transactions and Translations Guarantees and Collateralizations -- SEC Reporting Considerations Impairments and Disposals of Long-Lived Assets and Discontinued Operations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures and Metrics Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows

iii

Contents

Prefacexx

Contactsxxi

Chapter 1 -- Overview

1

Chapter 2 -- Scope

3

2.1Background

3

2.2Entities

3

2.3Instruments

3

2.3.1Background

3

2.3.2Debt

3

2.3.2.1General

3

2.3.2.2Convertible Debt

4

2.3.2.3Share-Settled Debt

5

2.3.2.4Certain Obligations With Characteristics Similar to Debt

6

2.3.3Loan Commitments

7

2.3.4Financial Instruments

9

2.3.5Financial Liabilities

10

2.3.6Topics That Are Beyond the Scope of This Roadmap

10

Chapter 3 -- Contract Analysis

12

3.1Background

12

3.2Identifying and Evaluating Contractual Terms

12

3.3Units of Account

13

3.3.1Background

13

3.3.2Freestanding Financial Instruments

13

3.3.2.1Framework for Identifying Freestanding Financial Instruments

13

3.3.2.2Combination Guidance

18

3.3.2.3Application to Debt With Detachable Warrants

19

3.3.3Other Elements That Warrant Separate Accounting Recognition

20

3.3.3.1Background

20

3.3.3.2Registration Payment Arrangement

21

3.3.3.3Debt Issued With Third-Party Guarantee

23

3.3.3.4Other Transaction Elements

24

iv

3.4Allocation of Proceeds to Units of Account 3.4.1Background 3.4.2Allocation Methods 3.4.2.1Background 3.4.2.2With-and-Without Method 3.4.2.3Relative Fair Value Method 3.4.3Application Issues 3.4.3.1Fair Value Exceeds Debt Proceeds 3.4.3.2Debt With Detachable Warrants

3.5Allocation of Issuance Costs to Units of Account 3.5.1Background 3.5.2Allocation Methods 3.5.3Application Issues 3.5.3.1Credit Facilities With Both Revolving and Nonrevolving Components 3.5.3.2Transactions That Involve the Receipt of Noncash Financial Assets 3.5.3.3Interim Bridge Financing and Other Services 3.5.3.4Convertible Debt Within the Scope of the CCF Guidance in ASC 470-20

Chapter 4 -- Initial Recognition and Measurement of Debt

4.1Background 4.2Recognition Date 4.3Debt Subject to ASC 835-30

4.3.1Background 4.3.2Scope 4.3.3Present Value Concepts 4.3.4Debt Issued in Exchange For Cash 4.3.5Debt Issued in Exchange for Property, Goods, or Services

4.3.5.1General 4.3.5.2Circumstances in Which the Presumption Does Not Apply 4.3.5.3Imputed Interest Rate 4.3.6Discounts and Premiums 4.4Debt Subject to the Fair Value Option 4.4.1Background 4.4.2Scope 4.4.3Election Dates 4.4.4Level of Aggregation 4.4.5Initial Measurement

Contents

27 27 27 27 28 28 29 29 31 32 32 33 33 33 34 37 38

39

39 39 40 40 40 41 42 44 44 45 46 48 50 50 50 51 52 54

v

Deloitte | A Roadmap to the Issuer's Accounting for Debt

Chapter 5 -- Accounting for Debt Issuance Costs and Fees

56

5.1Background

56

5.2Qualifying Debt Issuance Costs

56

5.3Costs and Fees Associated With Nonrevolving Debt

57

5.3.1Background

57

5.3.2Accounting for Costs and Fees Incurred Before Debt Issuance

58

5.3.2.1General

58

5.3.2.2Nonrevolving Loan Commitment Fees

58

5.3.2.3Shelf Registration Costs and Fees

59

5.3.3Accounting for Costs and Fees Upon Debt Issuance

59

5.3.3.1Debt Issuance Costs

59

5.3.3.2Fees and Other Amounts Paid to the Creditor

60

5.3.4Accounting After Debt Issuance

61

5.4Costs and Fees Associated With Revolving Debt

61

5.5Fair Value Option

63

Chapter 6 -- Subsequent Accounting for Debt

64

6.1Background

64

6.2Interest Method

64

6.2.1Background

64

6.2.2Scope

65

6.2.3Interest Method Mechanics

65

6.2.3.1Background

65

6.2.3.2Inputs to the Interest Method

66

6.2.3.3Effective Interest Rate

66

6.2.3.4Periodic Interest Cost

68

6.2.3.5Net Carrying Amount

69

6.2.3.6Accrual Between Payment Dates

70

6.2.3.7Use of Alternative Methods

71

6.2.3.8Comprehensive Examples

75

6.2.4Amortization Period

78

6.2.4.1General

78

6.2.4.2Puttable Debt Involving a Discount

79

6.2.4.3Puttable Debt Involving a Premium

81

6.2.4.4Callable Debt

81

6.2.4.5Extendable Increasing-Rate Debt

81

6.2.4.6Debt With a CCF

84

6.2.4.7Debt With a BCF

85

6.2.5Debt With Contingent or Variable Cash Flows or Other Unique Features

86

6.2.5.1Background

86

6.2.5.2Variable-Rate Debt

87

6.2.5.3PIK Interest

87

6.2.5.4Loss Contingencies

90

vi

6.2.5.5Gain Contingencies 6.2.5.6Actual or Expected Payment Defaults 6.2.5.7Nonrecourse Beneficial Interests 6.3Fair Value Option 6.3.1Background 6.3.2Presentation Guidance for Instrument-Specific Credit Risk 6.3.2.1Measuring Instrument-Specific Credit Risk 6.3.2.2Foreign-Currency-Denominated Liabilities 6.3.2.3Nonrecourse Financial Liabilities 6.3.3Presentation of Interest Expense

Chapter 7 -- Special Accounting Models for Certain Types of Debt

7.1Background 7.2Sales of Future Revenues

7.2.1Background 7.2.2Scope 7.2.3Classification

7.2.3.1Background 7.2.3.2Legal Form of Debt 7.2.3.3Seller's Involvement in the Generation of the Cash Flows 7.2.3.4Cancellation Provisions 7.2.3.5Limited Investor Rate of Return 7.2.3.6Limited Investor Exposure to Variability 7.2.3.7Investor Recourse Rights 7.2.4Debt Model 7.2.4.1Initial Accounting 7.2.4.2Subsequent Accounting 7.2.4.3Changes in Actual or Estimated Cash Flows 7.2.5Deferred Income Model 7.3Participating Mortgages 7.3.1Background 7.3.2Scope 7.3.3Participation in Market Value Appreciation 7.3.3.1Background 7.3.3.2Initial Accounting 7.3.3.3Subsequent Accounting 7.3.3.4Example 7.3.4Participation in Results of Operations 7.3.4.1Background 7.3.4.2Initial Accounting 7.3.4.3Subsequent Accounting

vii

Contents

91 91 92 95 95 96 96 97 98 98

100

100 100 100 100 102 102 104 104 105 105 105 105 106 106 106 107 109 110 110 110 112 112 113 113 114 116 116 116 117

Deloitte | A Roadmap to the Issuer's Accounting for Debt

7.3.5Other Considerations

117

7.3.5.1Variable-Rate Participating Mortgages

117

7.3.5.2Extinguishments

118

7.3.5.3Disclosure

118

7.4Indexed Debt

118

7.4.1Background

118

7.4.2Scope

119

7.4.3Embedded Indexation Feature

119

7.4.4Separate Indexation Features

119

7.4.5Intrinsic Value Method

120

7.5Joint-and-Several Liability Arrangements

121

7.5.1Background

121

7.5.2Scope

122

7.5.3Measurement

123

7.5.4Offsetting Entry

124

7.5.5Disclosure

125

7.6Convertible Debt

126

7.6.1Background

126

7.6.2Traditional Convertible Debt

126

7.6.3Convertible Debt Issued at a Substantial Premium

129

7.6.4Debt With a CCF

131

7.6.4.1Background

131

7.6.4.2Scope

133

7.6.4.3Initial Accounting

133

7.6.4.4Subsequent Accounting

135

7.6.4.5Reclassification

136

7.6.5Debt With a BCF

136

7.6.5.1Background

136

7.6.5.2Scope

136

7.6.5.3Initial Accounting

137

7.6.5.4Subsequent Accounting

139

7.6.5.5Contingent BCFs

139

7.6.5.6Reclassification

141

7.6.6Temporary Equity

141

7.7Debt Exchangeable Into the Stock of Another Entity

143

Chapter 8 -- Embedded Derivatives

8.1Background 8.2Identification of Embedded Features

8.2.1General 8.2.2Payoff-Profile Approach to Identifying Embedded Derivatives 8.2.3Illustration of the Identification of Embedded Features 8.2.4Embedded Features in Convertible Debt With a Separately Recognized Equity Component

145

145 146 146 147 149 151

viii

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download