Defining Issues | July 2017
 

FASB changes accounting and EPS for certain instruments with down round features

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KPMG reports on ASU 2017-11, under which down round features will not cause certain instruments to be accounted for as derivatives.  This means that fewer free-standing equity-linked instruments with down round features will be accounted for as liabilities and fewer features with down round features will be bifurcated from the host contract than under current accounting.

Applicability

ASU 2017-11

  • An entity that issues equity-linked financial instruments that contain down round features

Relevant dates

Mandatory effective dates and early adoption provisions:

Effective date:

Annual periods – Fiscal years beginning after

Interim periods – In fiscal years beginning after

Public business entities

December 15, 2018

December 15, 2018

All other entities

December 15, 2019

December 15, 2020

Early adoption allowed? Yes, including interim periods.

Key impacts

  • Equity-linked instruments or embedded equity-linked features will not be accounted for as a liability solely because there is a down round feature
  • Fewer free-standing equity-linked instruments with down round features will be accounted for as liabilities than under current accounting
  • Fewer embedded equity-linked features with down round features will be bifurcated from the host contract
  • A company will still need to evaluate other features in the equity-linked instrument to determine whether the instrument or embedded feature should be accounted for as a liability
  • A company that presents EPS information will reflect the effect of a down round feature of free-standing equity-linked financial instruments in EPS only if it is triggered
  • The ASU prescribes how the company will measure the effect of the down round feature, which will be accounted for as a deemed dividend when computing income available to common shareholders in basic EPS

A down round feature is a provision in an equity-linked instrument that reduces the strike price of a financial instrument if the entity:

  • sells additional shares of its common stock for an amount less than the current strike price of the equity-linked instrument; or
  • issues an equity-linked instrument with a strike price below the current strike price of the financial instrument.

A down round feature exists to protect certain investors from a decline in an entity’s share price. Although a down round feature is not normally a significant driver of the fair value of the instrument, the fair value of that instrument is somewhat greater than a similar equity-linked instrument without a down round feature.

Report contents

  • Applicability
  • What is a down round feature?
  • Key facts and impacts
  • What did the ASU Change?
  • Computing EPS
  • Disclosures
  • Scope exception for mandatorily redeemable financial instruments
  • Effective date and transition for down round features

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