Project Objective:

The objective of this project is to improve and align the two existing indexation models in Topic 480, Distinguishing Liabilities from Equity, and Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, used to evaluate financial instruments with characteristics of equity by developing an indexation principle to reduce inconsistencies across GAAP.

Background:

Under its project that resulted in the issuance of Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, the Board explored improvements to the derivatives scope exception for contracts in an entity’s own equity in Subtopic 815-40 as part of the proposed Accounting Standards Update, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which was issued on July 31, 2019. The amendments in that proposed Update included a remote likelihood threshold that would have allowed an entity to disregard certain contingent events when applying the derivatives scope exception. However, because of mixed views received from comment letter respondents and during outreach, the Board was unable to determine the operability and auditability of the those proposed amendments. To avoid delaying the other amendments under the Distinguishing Liabilities from Equity project, at its February 5, 2020 meeting, the Board removed the amendments related to the remote likelihood threshold from that project’s scope and decided to further explore improvements to aspects of the derivatives scope exception guidance under the Distinguishing Liabilities from Equity Phase 2 project.

Exposure Draft:

There are no exposure documents at this time.

There are no media releases or educational materials at this time.

Decisions Reached at Last Meeting (as of February 3, 2021):

The Board continued initial deliberations by discussing the project direction to help focus the staff’s research and outreach efforts.

The Board decided that the project scope should include the following instruments and features:

1. Freestanding financial instruments that have all the characteristics of a derivative instrument
2. Freestanding instruments that potentially are settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative instrument
3. Embedded features that have the characteristics of a derivative instrument.

The Board also decided that the project scope should include both Step 1 (contingent exercise provisions) and Step 2 (settlement provisions) of the indexation guidance in Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity.

Additionally, the Board directed the staff to develop alternatives for indexation guidance that focus on:

1. Both a qualitative principle and a quantitative threshold, rather than alternatives that are solely qualitative or quantitative in nature
2. Instruments or features that are not indexed to an entity’s own equity, rather than instruments or features that are indexed to an entity’s own equity.

Tentative Board Decisions Reached to Date (as of February 3, 2021):

A summary of the Board’s tentative decisions reached to date can be found here.

The Board meeting minutes, handouts, and videos are provided for the information and convenience of constituents who want to follow the Board’s 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.

The following are links to the minutes for each meeting.  To view Board meetings and handouts from the past 90 days, click here.
 

February 3, 2021	Board Meeting—The Board continued initial deliberations by discussing the project direction to help focus the staff’s research and outreach efforts.
August 26, 2020	Board Meeting—The Board began initial deliberations and determined project direction.
February 5, 2020	Board Meeting—The Board added to its agenda a separate project to improve aspects of the derivatives scope exception guidance.

The Board will continue initial deliberations at a future meeting.

Aarika Friend
Supervising Project Manager
afriend@fasb.org

Marla Lewis
Practice Fellow
mlewis@fasb.org

Henry Mirsberger
Postgraduate Technical Assistant
hmirsberger@fasb.org

Matthew Shea
Postgraduate Technical Assistant
mshea@fasb.org