A reporting entity may elect to measure certain of its debt instruments at fair value, generally on an instrument-by-instrument basis, under the guidance in ASC 825. Electing to carry an instrument at fair value is commonly referred to as the fair value option. Generally, a reporting entity can only elect the fair value option on the date the debt instrument is initially recognized. Once made, the election is irrevocable unless a remeasurement event occurs.
ASC 825-10-15-5(f) provides guidance on the application of the fair value option to certain convertible debt instruments.

Excerpt from ASC 825-10-15-5

No entity may elect the fair value option for any of the following financial assets and financial liabilities:
f. Financial instruments that are, in whole or in part, classified by the issuer as a component of shareholders’ equity (including temporary equity)

Convertible debt instruments issued with a substantial premium are not eligible for the fair value option under ASC 825 based on this guidance. The fair value option may be elected for all other convertible debt instruments, although reporting entities do not frequently elect to do so.
FV 5 discusses the principal reporting and presentation implications for items for which the fair value option is elected. With respect to debt, these implications include the following:
  • The initial carrying amount of the debt is its fair value, determined in accordance with ASC 820, Fair Value Measurement, which may differ from the proceeds received upon issuance
  • Issuance costs associated with the debt may not be deferred
  • A reporting entity should make an accounting policy election when reporting interest expense attributable to a debt instrument carried at fair value. See FSP for information on the presentation of interest expense (and other changes in fair value) for debt instruments carried at fair value.
See FV 6 for information on valuation considerations relevant to debt.
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