Hot Topic | December 2020

 

Insight

How convertible debt will be affected by ASU 2020-06

KPMG provides guidance on how ASU 2020-06 will affect convertible debt an issuer can settle in cash and/or shares.

Mahesh Narayanasami

Mahesh Narayanasami

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-7355

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

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