ALL freestanding instruments are potentially subject to ASC 480. In its scope paragraph subsection (ASC 480-10-15), ASC 480 states that it applies to all entities and to all freestanding instruments (note that ASC 480 does NOT apply to embedded features). ASC 480 also states that it should be applied to the instrument in its entirety and that any nonsubstantive or minimal features should be ignored. The point is to focus on the substance of the instrument by looking at its primary features.
ASC 480 lists the following freestanding instrument as falling within its scope (ASC 480-10-25):
- Mandatorily redeemable financial instruments (e.g., mandatorily redeemable preferred stock);
- Obligations to repurchase the entity’s equity shares by transferring assets (e.g., written put options and forward purchase contracts);
- Certain obligations to issue a variable number of shares if, at inception of the instrument, the monetary value of the obligation is based solely or predominantly on any one of the following:
- A fixed monetary amount known at inception (commonly referred to as ‘stock settled debt’);
- Variations in something other than the fair value of the issuer’s equity stock (the example provided is an instrument indexed to the S&P 500 and settlable in a variable number of the entity’s shares);
- Variations inversely related to changes in the fair value of the entity’s equity shares (a written put option being the example given).