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Equity securities are defined in ASC 320-10-20 as those that represent:
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Ownership interest in an entity (e.g., common, preferred and other capital stock).
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Right to acquire an ownership interest at fixed or determinable prices (e.g., warrants, rights and call options).
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Right to dispose of an ownership interest at fixed or determinable prices (e.g., put options).
All of the stated or implied terms and features of an instrument should be factored into the determination of whether an instrument is considered to be debt or equity. Typically, equity securities do not include convertible debt or preferred stock that by its terms either must be redeemed by the issuing company or is redeemable at the option of the investor through a unilateral right to demand redemption by the individual investor. Convertible preferred stock that does not have mandatory redemption provisions or is not redeemable at the option of the investor would typically be considered an equity security.
The definition of an equity security includes certain physically settled warrants and purchased options (provided the warrant or option does not meet the definition of a derivative) but not written warrants and options. Equity securities exclude written warrants and options because they represent obligations of the writer, not investments. The definition of equity security also excludes cash settled options on equity securities and options on equity-based indexes, because those instruments do not represent ownership interests in an entity.
ASC 320 may be applicable to a small equity investment in a publicly traded venture capital company that has been made for strategic purposes and not for the return it will yield (often referred to as foothold investments), provided the company's equity investment has a readily determinable fair value and is not being accounted for under the equity method or specialized accounting guidance for investment companies.
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