Posted by & filed under .

There may be circumstances that require the company to cash-settle an embedded derivative feature. If the holders of shares underlying the embedded derivative also receive cash in exchange for their shares, then equity classification is permitted. An example of this is a conversion feature that must be net-cash settled if the company affects a change of control. If the holders of the conversion feature are the only parties net-cash settled, then equity classification is not permitted. If, however, holders of the underlying stock into which the instrument is convertible would also be net-cash settled upon a change of control, then this criterion is met. Entities should be mindful to consider whether an instrument that requires net-cash settlement under certain circumstances has two different settlement results. For example, a purchase warrant with an embedded contingent put has a share settlement component (the share purchase option) and a net cash settlement component (the contingent put).

The above does not apply if the cash payment is required only upon final liquidation of the entity. The first paragraph does apply if the instrument is cash settled and the holders of the underlying shares receive consideration other than cash, say a not.

Comments are closed.