If the counterparty has the right to choose settlement in either shares or cash, a compound financial instrument is split into a liability and an equity component.

Question

Quizplus · Accepted Answer

When a financial instrument gives the counterparty the option to choose settlement in either shares or cash, it contains both a liability component (the obligation to transfer cash or another financial asset) and an equity component (the option to settle in shares), necessitating the split into these two components for accounting purposes.

If the Counterparty Has the Right to Choose Settlement in Either