Expand
Resize
Add to favorites
ASU 2020-06 eliminates the beneficial conversion feature model for both convertible preferred stock and convertible debt. Under the new guidance, convertible preferred stock is subject to the measurement provisions that require a reporting entity to record the value of the effect of a down round feature when it is triggered. Convertible debt continues to be excluded from the measurement provisions of the down round guidance because ASC 825 requires an issuer of convertible debt to disclose the fair value of the convertible debt (at the convertible debt instrument level) in the notes to the financial statements.
The ASC Master Glossary provides the following definition of a down round feature.

Definition from ASC Master Glossary

Down round feature: A feature in a financial instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial instrument.

A down round feature may reduce the strike price of a financial instrument to the current issuance price, or the reduction may be limited by a floor or on the basis of a formula that results in a price that is at a discount to the original exercise price but above the new issuance price of the shares, or may reduce the strike price to below the current issuance price. A standard antidilution provision is not considered a down round feature.

Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments issued by private reporting entities, but may also be found in financial instruments issued by public reporting entities. These features reduce the strike price of the instrument when an issuer sells shares of its stock (or issues equity-linked instruments) for amounts less than the current strike price (or with a strike price less than the current strike price).
When a down round feature is triggered (i.e., when the strike or conversion price is reduced) on an equity-classified freestanding financial instrument (e.g., a warrant) or an equity-classified convertible preferred stock (if the conversion feature has not been bifurcated), reporting entities that present earnings per share must recognize the value of the effect of the down round feature as a deemed dividend. This value reduces the income available to common stockholders in the computation of basic earnings per share.
The value of the effect of the down round is calculated as the difference between (1) the fair value of the financial instrument (without the down round feature) with a strike price corresponding to the stated strike price of the issued instrument (that is, before the strike price reduction), and (2) the fair value of the financial instrument (without the down round feature) with a strike price corresponding to the reduced strike price. These fair values are determined as of the date the down round feature is triggered.
Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Your session has expired

Please use the button below to sign in again.
If this problem persists please contact support.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide