How convertible debt will be affected by ASU 2020-06
Hot Topic | December 2020
KPMG provides guidance on how ASU 2020-06 will affect convertible debt an issuer can settle in cash and/or shares.
Using an illustrative example that compares ASU 2020-06 to current GAAP, KPMG discusses certain effects arising from the adoption of the ASU; as well as considerations around contractually modifying an Instrument X to an Instrument C and other transition guidance.
Applicability
Entities that issue convertible instruments or contracts in an entity's own equity.
Relevant dates
| Effective date | Public entities | All other entities |
|---|---|---|
Annual periods – Fiscal years beginning after | December 15, 2021 | December 15, 2023 |
Interim periods – In fiscal years beginning after | December 15, 2021 | December 15, 2023 |
Early adoption allowed? | Yes, no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years1. | |
1 An entity that has not yet adopted the amendments related to certain instruments with down-round features in ASU 2017-11 may adopt the recognition and measurement amendments in ASU 2020-06 for any convertible security that includes a down-round feature (see Defining Issues) in financial statements that have not yet been issued or made available for issuance for fiscal years (or interim periods) beginning after December 15, 2019. | ||
Key Impacts:
- Changes accounting for convertible instruments by reducing the number of accounting models. This, in turn, will likely have the following financial statement effects:
- Increase debt
- Decrease equity
- Lower interest expense.
- Amends requirements for a conversion option to be classified in equity, which will likely result in more conversion features meeting a scope exception from embedded derivative accounting.
- Amends diluted EPS calculations for certain convertible debt instruments, which will generally result in more dilutive EPS results.
Report contents
- Background and key impacts
- Effects of ASU 2020-06 on Instrument X
- Effective date and transition
Download the document:
Convertible instruments
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