Board Decisions*
Decisions Reached at Last Meeting (as of February 13, 2019):
The Board provided direction for the project as it relates to (a) disclosures for convertible instruments, (b) determining whether instruments are indexed to, and settled in, an entity’s own stock within the context of the derivative scope exception and related disclosure, and (c) earnings per share.
Tentative Board Decisions Reached to Date (as of February 13, 2019):
February 13, 2019
The Board deliberated disclosures for convertible instruments and decided to:
- Add disclosure objectives for convertible debt and for convertible preferred shares.
- Amend disclosure guidance related to certain terms and features of convertible instruments as follows:
- Add a disclosure requirement about events or changes in conditions/circumstances that occur during the reporting period and significantly affect the conversion conditions.
- Add a disclosure requirement to identify which party controls the pertinent rights and privileges under paragraph 505-10-50-3 of the various convertible securities outstanding.
- Align the disclosure requirements for contingently convertible instruments and other convertible instruments.
- Amend the guidance in Subtopic 825-10, Financial Instruments—Overall (which applies to public business entities), to require disclosure of information about fair value and leveling of convertible instruments at the individual instrument level together with the related carrying amount.
- Centralize guidance on convertible debt in Subtopic 470-20, Debt—Debt with Conversion and Other Options, and guidance on convertible preferred shares in Topic 505, Equity.
- Improve the format of disclosing certain quantitative information about convertible instruments, including:
- Basic information, such as principal amount, coupon rate, unamortized issuance cost and discount, net carrying amount, fair value amount, and maturity date at the instrument level
- Interest expense recognized for the period relating to both the contractual interest coupon and amortization of the discount and issuance cost
- Long-term debt (including convertible debt) maturities and sinking fund requirements for each of the five years following the date of the latest balance sheet presented.
The Board directed the staff to draft illustrative examples of both a tabular format disclosure and a narrative disclosure for the implementation guidance.
The Board deliberated improvements to the derivatives scope exception and decided to:
- Layer a probability threshold to existing guidance in Section 815-40-15, Derivatives and Hedging—Contracts in Entity’s Own Equity—Scope and Scope Exceptions. All existing guidance will remain; however, evaluating potential adjustments that are remote in occurring no longer will be required.
- Amend the settlement criteria in Section 815-40-25, Derivatives and Hedging—Contracts in Entity’s Own Equity—Recognition, by removing the following:
- Requirement to evaluate provisions that could require net cash settlement but are remote of occurring
- Condition regarding settlement in unregistered shares in paragraph 815-40-25-10(a)
- Collateral condition in paragraph 815-40-25-10(g)
- Shareholder rights condition in paragraph 815-40-25-10(f).
- Require entities to reassess classification on the occurrence of a triggering event. The Board directed the staff to ask a specific question in the proposed Update regarding requiring reassessments at annual reporting periods.
- Make three disclosure improvements in Subtopic 815-40:
- Add a disclosure objective for instruments that are within the scope of Subtopic 815-40
- Clarify the scope of the disclosures in Subtopic 815-40
- Require disclosure of triggering events that could cause a reclassification of a contract for disclosures under Section 815-40-50, Derivatives and Hedging—Contracts in Entity’s Own Equity—Disclosure.
- Not require fair value disclosure of equity-classified instruments. The Board directed the staff to ask a specific question in the proposed Update regarding fair value disclosures of equity-classified instruments.
The Board deliberated earnings per share and decided to:
- Require application of the if-converted method for all convertible instruments
- Make a technical correction to paragraph 260-10-55-34 regarding year-to-date share calculation to correct the inconsistency between paragraphs 260-10-55-3 and 260-10-55-34
- Remove an entity’s ability to overcome the presumption about share settlement for a contract that may be settled in either cash or shares.
The Board directed the staff to ask a specific question in the proposed Update regarding other potential improvements to the diluted earnings-per-share calculation.
January 30, 2019
At the January 30, 2019 Board meeting, The Board discussed (a) disclosures for convertible instruments, (b) determining whether instruments are indexed to, and settled in, an entity’s own stock within the context of the derivative scope exception and related disclosure, and (c) earnings per share. The meeting was educational; no decisions were made.
June 6, 2018
At the June 6, 2018 Board meeting, the Board began deliberations by discussing the direction of the project as it relates to the paths for (1) accounting for convertible instruments and (2) determining whether instruments are indexed to an entity’s own stock (referred to as indexation) within the context of the derivative scope exception.
Convertible Instruments
The Board directed the staff to further research convertible instruments. The research will focus on accounting for convertible instruments with embedded conversion features as a single unit of account based on the model for traditional convertible debt. Convertible instruments with embedded conversion features that meet the definition of a derivative and that are ineligible for the derivative scope exception are outside the scope of the research. The research also will focus on how to improve disclosures and provide information about earnings per share.
Indexation
The Board directed the staff to further research the classification, disclosures, and earnings per share related to the following paths for determining whether a contract is indexed to an entity’s own stock within the context of the derivative scope exception:
- Monetary value. An instrument (or feature) would not be indexed to an entity’s own stock if the monetary value of the obligation is based solely or predominantly on a fixed monetary amount or variations in something other than the fair value of the entity’s shares.
- Antidilution. An instrument (or embedded feature) would be considered indexed to an entity’s own stock if its settlement amount will equal the difference between (a) the fair value of a fixed number of the entity’s equity shares and (b) a fixed monetary amount or a fixed amount of a debt instrument issued by the entity. If the instrument’s strike price, or the number of shares, used to calculate the settlement amount is variable, the instrument (or embedded feature) would be indexed to the entity's own stock if the only variables that could affect the settlement amount would be a standard antidilution provision.
September 20, 2017
At the September 20, 2017 Board meeting, the Board decided to add to its agenda a project on distinguishing liabilities from equity. The objective of the project is to improve understandability and reduce complexity (without loss of information for users). The project will focus on indexation and settlement (in the context of the derivative scope exception), convertible debt, disclosures, and earnings-per-share.
