A reporting entity may execute agreements in connection with the issuance of a debt instrument. Registration rights allow the holder to require that the reporting entity file a registration statement for the resale of specified instruments and may be provided to lenders in the form of a separate agreement, such as a registration rights agreement, or included as part of an investment agreement such as an investment purchase agreement, warrant agreement, debt indenture, or preferred stock indenture. These arrangements may require the issuer to pay additional interest in the event that a registration statement is not filed or is no longer effective.

The ASC Master Glossary provides a definition of a registration payment arrangement.

ASC 825-20-15-4 provides exceptions to the provisions of the registration payment arrangement guidance.

There is no recognition of a registration payment arrangement unless transfer of consideration under the arrangement is probable and the payment amount or a range of payment amounts can be reasonably estimated. In that case, the contingent liability under the registration payment arrangement recognized upon issuance of the debt instrument should be included in the allocation of proceeds from the related financing transaction. The remaining proceeds should then be allocated to the financial instruments issued based on the provisions of other US GAAP. For example, if a registration payment arrangement relates to debt issued with warrants, the registration payment proceeds should be recognized and measured under ASC 450, Contingencies, first, then the remaining proceeds should be allocated between the debt and warrants. Subsequent remeasurement of the registration payment arrangement under ASC 450 would be recorded in earnings.

Any change in the value of the estimated contingent liability should be recognized in the income statement.

The contingent escalation clause is a contingent obligation to pay additional interest that meets the definition of a registration payment arrangement within the scope of ASC 825-20. Accordingly, the reporting entity should recognize the contingent obligation to pay additional interest using the guidance in ASC 450-20-25. That is, a liability should be recorded once payment is probable and the payment amount, or a range of payment amounts, can be reasonably estimated.

If, at issuance, payment under the contingent escalation clause is not probable (or the range of payment amounts cannot be reasonably estimated), the convertible debt should be measured without regard to the contingent obligation to pay additional interest. See FG 6 (post adoption of ASU 2020-06) or FG 6A (pre adoption of ASU 2020-06) for information on the accounting for convertible debt.

If payment under the escalation clause is probable when the debt is issued, and the payment amount or a range of payment amounts can be reasonably estimated, the proceeds received from the convertible debt should be first allocated to the contingent liability and then allocated to the convertible debt. If payment under the escalation clause becomes probable after the debt is issued, and the payment amount or a range of payment amounts can be reasonably estimated, a contingent liability should be recorded with an offsetting entry to the income statement.