Project Objective:

The objective of the Induced Conversions of Convertible Debt Instruments (EITF Issue No. 23-A) project is to improve the relevance of the existing induced conversion guidance in Subtopic 470-20, Debt—Debt with Conversion and Other Options.

Background:

In November 2022, an Agenda Request was submitted by the Big Four accounting firms requesting that the Emerging Issues Task Force (EITF) address whether certain convertible debt instruments settled using terms that differ from the stated contractual conversion provisions should be accounted for as an induced conversion or extinguishment. Following 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, stakeholders have raised questions about the accounting for certain settlements of convertible debt instruments that do not occur in accordance with the contractual conversion provisions of such instruments. Those questions primarily relate to convertible debt instruments whose provisions permit the issuer to settle conversions partly or wholly in cash (that is, instruments with cash conversion features). In addition, stakeholders have raised other general questions about the application of the induced conversion model.

In April 2023, the Board decided to add a project to the EITF agenda. The project scope focuses on the applicability of the induced conversion guidance to the early settlement of convertible debt instruments.

Exposure Draft(s):

There are no exposure documents at this time.

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

The Task Force reached a consensus-for-exposure to:

1. Pursue the preexisting contract approach for induced conversion assessment. Under this approach, only conversions that include the issuance of all the consideration (in form and amount) pursuant to conversion privileges included in the terms of the debt at issuance would be accounted for as induced conversions.
2. Include clarifications that, under the preexisting contract approach, when evaluating whether the amount of cash (or combination of cash and shares) issuable under the original conversion privileges is preserved by the inducement offer:
   1. An entity should determine the amount of cash and number of shares that would be issued based on the fair value of the entity’s shares as of the offer acceptance date.
   2. If within a year leading up to the offer acceptance date the debt has been exchanged or modified without being deemed to be substantially different, then the debt terms that existed a year ago should be used in place of the terms of the debt at issuance.
3. Apply induced conversion accounting to all convertible debt instruments, including instruments that are not currently convertible, so long as those instruments contained a substantive conversion feature as of the time of issuance and are within the scope of the guidance in Subtopic 470-20, Debt—Debt with Conversion and Other Options.

The Task Force also reached a consensus-for-exposure to permit either (a) prospective or (b) retrospective transition for convertible debt instruments settled after the adoption of the amendments in 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 Task Force also reached a consensus-for-exposure on certain transition disclosures.

Tentative Board Decisions:

Ratification of EITF consensus-for-exposure on EITF Issue No. 23-A, “Induced Conversions of Convertible Debt Instruments,” and Permission to Ballot.

The Board ratified the consensus-for-exposure reached by the EITF at its September 14, 2023 meeting and directed the staff to draft a proposed Accounting Standards Update reflecting the consensus-for-exposure for vote by written ballot.

Analysis of Costs and Benefits

The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected costs and expected benefits of the amendments in the proposed Update and that the expected benefits of the amendments would justify the expected costs.

Comment Period

The Board decided on a 90-day comment period for the proposed Update.

Tentative Board Decisions Reached to Date (as of October 4, 2023):

A summary of 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.
 

October 4, 2023*	Board Meeting—The Board ratified the EITF consensus-for-exposure.
September 14, 2023	EITF Meeting—The Task Force reached a consensus-for-exposure on the Issue.
June 15, 2023	EITF Meeting—The Task Force held an educational meeting to discuss the Issue and identified areas that require additional staff research to be discussed at a future meeting.
April 26, 2023	Board Meeting—The Board decided to add the project to the Emerging Issues Task Force agenda.

The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.

Mary Mazzella
Assistant Director
msmazzella@fasb.org

Lucy Cheng
Supervising Project Manager
lcheng@fasb.org

Chris Bohdan
Project Manager
cbohdan@fasb.org

Michael Chmelar
Practice Fellow
mchmelar@fasb.org

Josh Costo
Postgraduate Technical Assistant
jcosto@fasb.org

Caroline Kosmicki
Postgraduate Technical Assistant
ckosmicki@fasb.org