FASB proposes to clarify accounting for forwards and options

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The Financial Accounting Standards Board issued a proposed accounting standards update Monday that aims to clarify an issuer’s accounting for certain modifications of equity-classified forwards and options (such as warrants) that remain equity classified after their modification.

The proposed update is based on a consensus of FASB’s Emerging Issues Task Force. It would offer guidance on how an issuer would measure and recognize the effect of such transactions, outlining a principles-based framework to decide whether an issuer would recognize the modification or exchange as an adjustment to equity or as an expense.

Some of FASB’s constituents have expressed uncertainty about how issuers should account for modifications or exchanges of freestanding equity-classified forwards and options due to a lack of explicit guidance in FASB’s accounting standards codification. They’ve asked the board to provide guidance to clarify whether an issuer would account for a modification or an exchange of a freestanding equity-classified forward or option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related effects on earnings per share, if any, or (2) an expense and, if so, the manner and pattern of recognition. The proposed accounting standards update aims to provide that guidance.

FASB is asking for constituents to review the proposed accounting standard update and give their feedback by Dec. 28, 2020.

FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut

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Accounting standards FASB Financial reporting Options Investments
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