FASB releases standard for convertible instruments and contracts

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The Financial Accounting Standards Board released a new accounting standards update Wednesday aimed at improving financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.

The update promises to ease the accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Under the new standard, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The update gets rid of some settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will allow more equity contracts to qualify for it. The accounting standards update also simplifies the diluted earnings per share calculation in some ways.

“The ASU is an important step in simplifying a complex area of accounting guidance that has been a frequent source of financial statement restatements,” said FASB vice chairman James L. Kroeker (pictured) in a statement Wednesday. “We expect it to improve comparability of information for financial statement users and reduce cost and complexity for preparers and auditors.”

The update is effective for public business entities that meet the definition of a Securities and Exchange Commission filer, except for entities that are eligible to be considered smaller reporting companies, as defined by the SEC, for fiscal years starting after Dec. 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will take effect for fiscal years starting after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption will be allowed.

In its original exposure draft of the standard last July, FASB also proposed to simplify the accounting for equity contracts by reducing form-over-substance-based accounting conclusions that are influenced by remote contingent events when assessing the derivatives scope exception. But based on mixed feedback received from stakeholders during the public comment period, FASB opted not to include those proposed changes in the final standard. Nevertheless, FASB plans to continue to explore improvements in that facet of the guidance in a separate Phase 2 project.

The ASU, a FASB in Focus overview, and a video about the standard are available at www.fasb.org.

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FASB Accounting standards Financial reporting James Kroeker