Accounting for debt and equity instruments in financing transactions

This article was originally published on March 30, 2022, and has been updated.

The accounting for debt and equity instruments issued in financing transactions can be quite complicated due in part to the complexity inherent in certain instruments, the sheer volume of transaction documents that may need to be considered in performing the accounting analysis, and the myriad of accounting guidance that may be relevant. In many cases, an accounting outcome can be significantly affected by the existence or absence of one sentence in the relevant documents. Consideration needs to be given to not only the appropriate balance-sheet classification of instruments, such as preferred stock and warrants, which may have both debt and equity characteristics, but also the subsequent measurement. Additionally, instruments such as debt and preferred stock often have embedded features that may need to be given separate accounting recognition. The accounting analysis is further complicated if multiple instruments are issued as part of the same transaction, as that typically necessitates an allocation of proceeds to the various instruments or features.

Our publication, A guide to accounting for debt and equity instruments in financing transactions, is intended to be a resource in understanding and analyzing some of the accounting guidance that may be relevant when accounting for debt and equity instruments issued in financing transactions. While often the accounting for these instruments is not considered until after the transactions are finalized, the appropriate upfront consideration of the accounting ramifications can help to minimize the risk of unanticipated and undesirable accounting consequences. To assist in understanding the accounting guidance and ramifications, the guide includes the following five chapters:

1. Forward
2. Accounting for the issuance of multiple instruments or embedded features
3. Accounting for debt with conversion and other embedded features
4. Accounting for preferred and similar stock
5. Accounting for warrants and other equity-linked instruments

Each chapter discusses the accounting guidance and provides examples illustrating how this guidance should be applied to debt and equity instruments with various terms.

The May 2025 edition of this guide has been updated to incorporate guidance from Accounting Standards Update (ASU) 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, issued by the Financial Accounting Standards Board.

This edition has been amended to reflect the effectiveness of the following ASUs:

• ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)
• 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
• ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

This edition has also been updated to address additional practice issues including application of the guidance on determining whether an instrument (or embedded feature) is considered indexed to an entity’s own stock in specific situations. For additional information about these updates, refer to Appendix C which details the summary of significant changes from the March 2022 edition.