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An investor may obtain an instrument, such as a put or call option, that provides it with the right to purchase or sell the voting common stock of an investee at a future point in time. The investor must determine whether these instruments represent in-substance common stock. In performing this evaluation, an investor should first determine whether the instrument is a freestanding instrument or an embedded feature within a host agreement that might require bifurcation and separate accounting.
If the instrument is freestanding, the investor should determine whether it should be accounted for pursuant to ASC 815, Derivatives and Hedging. If the instrument is an embedded feature within a host agreement, the investor should evaluate whether the instrument should be bifurcated and accounted for separate from the host agreement pursuant to ASC 815. See DH 3 for more information.
The equity method of accounting does not apply to investments accounted for in accordance with ASC 815. Therefore, the investor should only evaluate those instruments that are not within the scope of ASC 815 to determine whether they represent in-substance common stock of the investee. Put options, call options, and other instruments that are not accounted for pursuant to ASC 815 may meet the characteristics of in-substance common stock.
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