Liabilities & Equity—Targeted Improvements
ACCOUNTING STANDARDS UPDATE NO. 2017-11, EARNINGS PER SHARE (TOPIC 260), DISTINGUISHING LIABILITIES FROM EQUITY (TOPIC 480) AND DERIVATIVES AND HEDGING (TOPIC) 815: 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
On July 13, 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings per share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic) 815: 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. Part I of the Update addresses the complexity of accounting for certain financial instruments with down round features. Part II of the Update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification®.
Specifically, the Update:
- Changes the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments.
- For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260, Earnings Per Share, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
- Convertible instruments with embedded conversion options that have down round features would be subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).
- The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480, Distinguishing Liabilities from Equity, that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
The amendments in Part I of this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. For all other entities, the amendments in Part I are effective for fiscal years beginning after December 15, 2019, and interim periods with fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in any interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The amendments in Part 1 of this Update should be applied in either of the following ways:
- Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective
- Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
- The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect.
What Organizations Are Affected by the New Guidance in the Update?
Part I of the new guidance affects any entity that issues financial instruments that include down round features. The amendments in Part I of this Update that relate to the recognition, measurement, and earnings per share of certain freestanding equity-classified financial instruments that include down round features affect entities that present earnings per share in accordance with the guidance in Topic 260, Earnings Per Share.
The amendments in Part II of this Update do not have an accounting effect.
- Download the Accounting Standards Update
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