Project Update

Liabilities and Equity—Targeted Improvements

Last updated on May 16, 2017. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)


The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Due Process Documents
*Decisions Reached at Last Meeting
*Tentative Board Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

The objective of this project is to make targeted improvements that simplify the accounting guidance for financial instruments with characteristics of liabilities and equity.

Items currently in the scope of this project are:
  1. Determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, specifically as it relates to features for which the strike price adjusts down on the basis of the pricing of future equity offerings (down rounds).
  2. The indefinite deferral in Topic 480, Distinguishing Liabilities from Equity, for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests by replacing the deferral with a scope exception.

Due Process Documents

On December 7, 2016, the FASB issued proposed Accounting Standards Update, Distinguishing Liabilities from Equity (Topic 480): Accounting for Certain Financial Instruments with Down Round Features, Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.  The comment period ended February 7, 2017.

*Decisions Reached at Last Meeting (May 10, 2017)

Display (Earnings Per Share)

The Board decided to require an earnings per share (EPS) numerator adjustment to income available to common shareholders in basic EPS for equity-classified freestanding financial instruments. That adjustment would be required for entities within the scope of Topic 260, Earnings Per Share, or entities that voluntarily provide EPS. The adjustment would be measured as the difference between the following amounts determined immediately after the down round feature is triggered:

1.The fair value of the financial instrument (without the down round feature) with a strike price corresponding to the current strike price of the instrument issued (that is, before the strike price reduction)
2.The fair value of the financial instrument (without the down round feature) with a strike price corresponding to the reduced strike price upon the down round feature being triggered.

The Board also decided that an entity that is required to make this EPS adjustment would recognize this adjustment in the balance sheet (as an equity adjustment between retained earnings and additional paid-in capital).

Disclosure

The Board decided that an entity that is required to present the EPS adjustment should disclose the value of the effect of the down round trigger. Additionally, the Board decided to amend the disclosure requirements in Topic 505, Equity, to clarify the application of those requirements to changes in conversion or exercise prices.

Transition and Effective Date

The Board affirmed the transition guidance in the proposed Update that an entity would apply a modified retrospective method of transition. That transition would be applied to outstanding instruments as of the effective date of the change, with a cumulative-effect adjustment to the opening balance of retained earnings in the fiscal year or interim period of adoption. The Board also decided to allow entities to apply a full retrospective method of transition.

The Board decided on the effective dates of the final guidance for public business entities and for all other entities as follows:
  1. Public business entities: Fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year
  2. All other entities: Fiscal years beginning after December 15, 2019, and interim reporting periods within fiscal years beginning after December 15, 2020
  3. Early adoption: For all entities upon issuance of the standard, early adoption would be allowed for financial statements of fiscal years or interim periods that have not yet been issued or that have not yet been made available for issuance.
Permission to Ballot

The Board decided that the benefits of the changes justify the expected costs of the changes and authorized the staff to draft a final Update for vote by written ballot.

*Tentative Board Decisions Reached to Date

Please see the linked PDF for a summary of decisions reached to date.

*Next Steps

The staff is in the process of drafting a final Accounting Standards Update, which is expected to be issued in the third quarter of 2017.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Boards' deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*May 10, 2017 Board Meeting—Final redeliberations and permission to ballot final Accounting Standards Update.
April 19, 2017 Board Meeting—Decisions regarding project direction for accounting for instruments with down round features.
March 22, 2017 Board Meeting—Discussions about comment letter feedback and project direction.
February 3, 2016 Board Meeting—Decisions regarding the scope of the Liability and Equity—Targeted Improvements project in the context of the Board’s technical agenda Discussion Paper.
September 16, 2015 Board Meeting—Decisions regarding accounting for instruments with down round features and the indefinite deferral in Topic 480 related to mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.
November 5, 2014 Board Meeting—Project added to the technical agenda
July 30, 2014 Board Meeting—Presentation of research
January 29, 2014 Board Meeting—Projected added to the research agenda

Background Information

In 2004, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) added a joint project to their agendas to develop an improved, common conceptual framework. The objective of the joint FASB/IASB project was to improve and simplify the financial reporting requirements for financial instruments with characteristics of equity. On November 30, 2007, the Boards issued their Preliminary Views, Financial Instruments with Characteristics of Equity. In 2010, the Boards acknowledged that they did not have the capacity to devote the time necessary to deliberate the project issues. At that point, the project became inactive. A summary of the activities and decisions of the Liabilities & Equity project can be found on the previous project page.

During the intervening period, U.S. stakeholders continued to express support for a project on distinguishing liabilities from equity. At the November 5, 2014 agenda prioritization meeting, the FASB decided to add the project to its technical agenda to address targeted issues with accounting for instruments with characteristics of liabilities and equity.

At the February 3, 2016 Board meeting on the technical agenda Discussion Paper, the Board decided to add a broader project on distinguishing liabilities and equity to its research agenda. Due to the addition of this broader project on liabilities and equity to the research agenda, the Board decided to remove Simplification of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock," from the scope of this project. The Board directed the staff to continue its work on the other areas included in the scope of this project.

Contact Information

Mary Mazzella
Supervising Project Manager
msmazzella@fasb.org

Rosemarie Sangiuolo
Project Consultant
rsangiuolo@fasb.org

Dillon Jones
Postgraduate Technical Assistant
djones@fasb.org