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A convertible debt instrument may contain a beneficial conversion feature (BCF) or contingent BCF if the conversion option is not accounted for separately. Given the number of convertible debt instruments that have separated conversion options (under the guidance in ASC 470 and ASC 815), it is unusual for a convertible debt instrument to have a BCF.
The ASC Master Glossary provides the definition of a beneficial conversion feature.

Definition from ASC Master Glossary

Beneficial Conversion Feature: A nondetachable conversion feature that is in the money at the commitment date.

A convertible instrument contains a BCF when the conversion price is less than the fair value of the shares into which the instrument is convertible at the commitment date. See FG for information on (1) determining the commitment date and conversion price used to assess whether a convertible instrument contains a BCF and (2) contingent BCFs.

6.7.1A Resetting a conversion option for a change in stock price—before adoption of ASU 2020-06

Some convertible instruments pay a fixed monetary amount to the investor upon conversion. To do this, the instrument’s conversion price is adjusted for increases or decreases in the fair value of the reporting entity’s stock. ASC 470-20-55-19 provides guidance for these instruments, which are in substance, stock-settled debt.

ASC 470-20-55-19

If the conversion price was described as $1 million divided by the market price of the common stock on the date of the conversion, that is, resetting at the date of conversion, the holder is guaranteed to receive $1 million in value upon conversion and, therefore, there is no beneficial conversion option and the convertible instrument would be considered stock-settled debt. However, if the conversion price does not fully reset (for example, resets on specified dates before maturity), the reset represents a contingent beneficial conversion feature subject to this Subtopic.

A reporting entity should assess the reset terms of its convertible instrument to determine whether it is stock-settled debt or a convertible instrument with a contingent BCF.

6.7.2A Measurement and recognition—before adoption of ASU 2020-06

A BCF is measured as the intrinsic value of the conversion option at the commitment date, representing the difference between the conversion price and the reporting entity’s stock price on the commitment date.
A BCF should be separated from a convertible instrument and recorded in additional paid-in capital. SEC registrants should present the BCF as mezzanine equity in periods in which it is redeemable, as described in ASC 480-10-S99-3A. The amount recorded in temporary equity is equal to the amount of cash an investor would receive upon redemption less the amount of liability recorded for the debt component.

Excerpt from ASC 480-10-S99-3A

…the equity-classified component of the convertible debt instrument should be considered redeemable if at the balance sheet date the issuer can be required to settle the convertible debt instrument for cash or other assets (that is, the instrument is currently redeemable or convertible for cash or other assets).

Although technically not required for nonpublic entities, mezzanine equity presentation is strongly encouraged, especially in those circumstances where there is not a high likelihood that the capital is in fact permanent, for example when the instrument is redeemable at the option of the holder at any time. On the other hand, use of a mezzanine presentation may be considered less relevant in other circumstances, such as when an instrument is redeemable by the holder only upon a remote event. If mezzanine presentation is not elected, separate presentation from other items within equity should be considered.
Separating a BCF will create a discount in the convertible debt that will result in additional interest expense.

6.7.3A Amortization of the discount created by separating a BCF—before adoption of ASU 2020-06

The discount on the convertible debt instrument created by separating a BCF, or contingent BCF, should be amortized over the period from the issuance date to the stated maturity date using the effective interest method; the amortization should be recognized as interest cost.
If the convertible debt is puttable by the investor prior to the first conversion date, we believe amortization of a discount created by separation of a BCF may be amortized over the period (1) from the issuance date to that first conversion date, or (2) from the issuance date to the first put date. A reporting entity should elect one of these options as an accounting policy and apply it consistently.
If a BCF is recorded on a convertible instrument with a multi-step discount, the amount of amortization recorded may require periodic adjustment to ensure that the BCF amount is at least equal to the intrinsic value the investor could realize if the instrument were converted at that point in time. See FG for information on convertible instruments with multiple-step discounts.

6.7.4A Conversion of convertible debt with a BCF—before adoption of ASU 2020-06

ASC 470-20-40-1 requires a reporting entity to recognize any unamortized discount resulting from the separation of a BCF upon conversion of the instrument as interest expense. Any other unamortized discounts (e.g., created by allocating proceeds to warrants issued with the convertible instrument) should also be recognized as interest expense upon conversion. In accordance with ASC 470-20-40-2, if the amount of BCF discount amortized exceeds the amount the holder realized because conversion occurred at an earlier date, no adjustment should be made to amounts previously amortized. This guidance is unique to convertible instruments containing a BCF and should not be applied to other convertible instruments.
If a convertible instrument with a multiple-step discount is converted at a point in time when the conversion price on that date is less beneficial than the conversion price used to initially record the BCF, any previously recognized amortization of the discount created by separating the BCF should not be reversed. See FG for information on BCFs with a multiple-step discount.

6.7.5A Extinguishment or redemption of convertible debt with a BCF—before adoption of ASU 2020-06

ASC 470-50-40-2 provides guidance on how to calculate a gain or loss on debt extinguishment.

Excerpt from ASC 470-50-40-2

A difference between the reacquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item.

The net carrying amount of debt includes any unamortized discount created by separating a BCF.
In addition to derecognizing the debt instrument, the reporting entity should derecognize the BCF as well. To do this, the reporting entity should perform the following steps.
•  Calculate the intrinsic value (i.e., the in-the-money amount) of the conversion option at the extinguishment date and allocate that amount to additional paid-in capital to redeem the BCF
•  Allocate the remainder of the reacquisition price to the extinguishment of the debt and record a gain or loss on debt extinguishment by comparing the reacquisition price allocated to the debt with the net carrying amount of the debt
See FG 3.7 for further information on debt extinguishment accounting.

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