EITF consensus - induced conversions of convertible debt

KPMG reports that the EITF reached a consensus-for-exposure that would provide additional guidance on whether induced conversion or extinguishment accounting should be applied to certain settlements of convertible debt instruments that do not occur in accordance with the instruments’ preexisting terms. If ratified by the Board, it is expected to be issued as a proposed Accounting Standards Update.

Applicability

EITF Issue No. 23-A

Key impacts

The EITF consensus-for-exposure would require companies to apply a preexisting contract approach to determine whether to apply induced conversion accounting:

• The inducement offer would need to preserve the form of consideration and result in an amount of consideration that is no less than that issuable pursuant to the pre-existing conversion privileges. 
• The preexisting and modified conversion privileges would be assessed as of the offer acceptance date. 
• To the extent convertible debt instruments have been exchanged or modified within the one-year period preceding the offer acceptance date, the entity would use the terms of the convertible debt instrument as they existed one year before the offer acceptance date in evaluating whether the form and amount of consideration test for inducement accounting is satisfied. 

The EITF consensus-for-exposure also clarifies that induced conversion accounting would apply to convertible debt instruments in the scope of Subtopic 470-20 (because they contain a substantive conversion feature) that are not currently convertible. 

Report contents

• Applicability
• Fast facts, impacts, actions
• Background
• Preexisting contract approach
• Clarification of certain criteria
• Currently convertible instruments
• Transition and disclosure

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