Defining Issue | July 2019

FASB proposal aims to simplify accounting for convertible instruments and contracts in an entity’s own equity

The proposed ASU includes amendments to eliminate three of the five existing accounting models for convertible instruments. Other proposed amendments would result in classifying as equity more contracts in an entity’s own equity that are currently accounted for as derivatives.

Applicability

Proposed ASU:

  • Entities that issue convertible instruments and/or contracts in an entity’s own equity, or present EPS information.

Relevant dates

  • July 31, 2019 – FASB issued proposed ASU
  • October 14, 2019 – Comments due on proposed ASU 

Key impacts

The more significant proposals would: 

  • Require an entity to account for a convertible instrument either as debt with a bifurcated embedded derivative or as a single unit under the traditional convertible debt model.
  • Eliminate the Subtopic 470-20 cash conversion, beneficial conversion and substantial premium accounting models for convertible instruments. 
  • Enhance disclosures about convertible instruments including
    • Adding information about events or conditions that significantly affect conversion, and 
    • Providing existing fair value disclosures at the instrument, not aggregate, level.
  • Require more contracts in an entity’s own equity currently accounted for as derivatives to be classified as equity by
    • Disregarding remote contingent events that could cause net cash settlement.
    • Removing some existing criteria currently requiring derivative accounting including those regarding settlement in unregistered shares, shareholder rights and collateral.
  • Amend EPS guidance to:
    • Require the if-converted method to calculate diluted EPS for certain convertible instruments. 
    • Require that share settlement be presumed when calculating diluted EPS for instruments that may be settled in cash or shares.
    • Include equity-classified convertible preferred stock with a down-round feature in the scope of relevant EPS guidance under Topic 260.

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