How convertible debt will be affected by ASU 2020-06

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

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