Defining Issues | December 2023

Insight

FASB proposal – induced conversions of convertible debt

FASB issues a proposed ASU on induced conversion accounting for convertible debt instruments.

Mahesh Narayanasami

Mahesh Narayanasami

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-7355

KPMG reports that the FASB issued a proposed Accounting Standards Update (ASU) 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. The 90-day comment period ends on March 18, 2024.

Applicability

  • Entities settling certain convertible debt instruments with cash conversion features (CCFs) pursuant to offers that differ from the instruments’ existing terms

Relevant dates

  • December 19, 2023 – FASB issued proposed ASU
  • March 18, 2024 – Comments due on proposed ASU

Key Impacts:

The proposed ASU would require companies to apply a preexisting contract approach to determine whether to apply induced conversion accounting.

Under the preexisting contract approach, 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 preexisting conversion privileges. The preexisting and modified conversion privileges are to 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 proposed ASU also clarifies that induced conversion accounting applies to convertible debt instruments within the scope of ASC 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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