EITF discusses accounting for derivative modifications

KPMG reports that the EITF reached a consensus-for-exposure that would require an entity that modifies equity-classified derivatives to apply a principles-based framework to determine the accounting treatment that best reflects the economic substance of the transaction.

Applicability

• An entity that issues equity-classified derivatives that:
  • subsequently modifies those derivatives; and
  • those derivatives remain equity classified after the modification

Key impacts

The consensus-for-exposure proposes:

• A recognition model that would include four categories of transactions, each with a corresponding accounting treatment:
  • Modifications in connection with a financing transaction to raise equity
  • Modifications in connection with a financing transaction to raise or modify debt
  • Modifications in connection with a transaction to transfer goods or services in a reciprocal arrangement
  • Other modifications not related to financing or compensation
• A measurement model that would require the value granted to the holder upon modification to be measured as the excess of the fair value of the derivative immediately after the modification over the fair value of the derivative immediately before the modification.
• The ability for entities to early adopt, and to choose between either a prospective approach or a full retrospective approach upon adoption.