Induced conversion of convertible debt

Induced conversions

The amendments in ASU 2024-04 require all the following criteria to be met for a settlement to qualify as an induced conversion:

• The settlement should occur under revised conversion terms that can be exercised only for a limited period of time.
• The settlement should result in the issuance of all of the consideration (in form and amount) issuable pursuant to the conversion terms of the existing convertible debt instrument.
• The settlement should involve a convertible debt instrument, regardless of whether it is currently convertible, that contains a substantive conversion feature as of both the date when initially issued and the date when the inducement offer is accepted by the convertible debt holder.

Issuance of all of the consideration (in form and amount)

Under the amendments in ASU 2024-04, the inducement offer should result in the issuance of all of the consideration, in form and amount, that is issuable under the existing convertible debt. This assessment should occur as of the date when the offer is accepted. The amendments also clarify the following:

• If the conversion terms under either the existing convertible debt or the inducement offer are based on a future share price (that is, the share price measured after the offer has been accepted) or on an average of future share prices (such as a VWAP), then the fair value of the shares as of the date when the inducement offer is accepted should be used to calculate the amount of cash (or other assets) as well as the number of shares issuable under the existing convertible debt and the inducement offer.
• Any change that causes the amount of cash (or other assets) and number of shares issuable not to be indexed to the future price of the issuer’s shares (for example, a change in the fair value of a commodity) is considered a change in the form of consideration that is not eligible for induced conversion accounting.
• If the convertible debt is exchanged or modified within the one-year period prior to the date when the inducement offer is accepted by the convertible debt holder and was not considered extinguished under ASC 470-50 at that time, then the conversion terms of the existing debt instrument that existed one year before the date when the offer is accepted by the convertible debt holder will be used to determine the applicability of inducement accounting.

Refer to Appendix A to see how to apply this guidance to common convertible debt instruments.

Existence of substantive conversion feature

The guidance in ASU 2024-04 clarifies that in order to be eligible for inducement accounting, a convertible debt should have a substantive conversion feature both when initially issued and when the inducement offer is accepted by the debt holder. Convertible debt that is not currently convertible based on its existing terms when the issuer makes an inducement offer is eligible for induced conversion accounting, provided that (1) the conversion option is substantive as of both the debt issuance date and the offer acceptance date, and (2) the other induced conversion criteria are met.

Transition and effective date

The guidance in ASU 2024-04 is effective for all entities for annual reporting periods beginning after December 15, 2025 and for interim reporting periods within those annual reporting periods. If the guidance is adopted in an interim reporting period, it should be applied as of the beginning of the annual reporting period that includes that interim reporting period.

Early adoption is permitted in an interim or annual reporting period if the financial statements have not yet been issued (or been made available for issuance), but not earlier than the adoption of the amendments in ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

The amendments in ASU 2024-04 can be adopted either on a prospective or on a retrospective basis.

Under the prospective transition approach, an entity would apply the amendments to any settlement of convertible debt instruments occurring after the adoption date.

Under the retrospective transition approach, an entity would apply the amendments to any settlement of a convertible debt instrument that occurs after the entity adopts the amendments in ASU 2020-06 and would recast prior periods and cumulative-effect adjustment to equity as of the beginning of the earliest period presented.

The following transition disclosure requirements apply in both the interim reporting period and the annual reporting period when the amendments in ASU 2024-04 are adopted:

• Under the prospective transition approach, the nature of, and reason for, the change in accounting principle
• Under the retrospective transition approach:
  • The nature of the change in accounting principle and an explanation of the newly adopted principle
  • The chosen method of adoption
  • The cumulative effect on retained earnings or other components of equity as of the beginning of the first reporting period
  • The effect on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amounts (if presented) of any prior periods retrospectively adjusted

Appendix A: Applying the ‘all consideration (in form and amount)’ guidance by type of convertible debt instrument