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Exceptions to the assumption of share settlement if the entity has the choice of net cash settlement or share settlement relate primarily to differences in the economic value of the settlement alternatives (net cash versus shares) or if one of the settlement alternatives is fixed, capped, floored or collared. These differences in economic value could result in disregarding the uneconomic alternative and overcome the assumption of net cash settlement. The economic value difference would have to be significant (at least 10%) and this difference would have to be evaluated at each balance sheet date as part of the classification reevaluation process required under ASC 815.

You need to carefully evaluate the terms of all agreements (those issued with this agreement and any issued previously that are still in force) that involve the counterparty to determine if the settlement results of the agreements should be chained and evaluated together. The ASC 815 guidance provides the example of a freestanding equity-linked agreement that provides the holder a fixed or guaranteed return such that the two instruments acting together behave like a debt instrument. In this case both agreements should be classified as liabilities regardless of any share-settled alternatives.

The ASC 815 guidance also provides the example of a detachable warrant that gives the holder the right to purchase shares at $75 and the right to put the warrant back to the company at $2,010 per share. The guidance requires liability classification of the warrant because of the significant difference in the economic value of the settlement alternatives (share settlement of the stock purchase option component versus cash settlement of the put component) and the effective guaranteed cash return afforded by the put. This warrant is in substance a debt instrument.

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