On the Horizon

Convertible Instruments and Equity Contracts

During the second half of 2020, the FASB expects to issue a new standard that would improve financial reporting for convertible instruments and contracts in an entity’s own equity.

The final standard will:
  • Reduce the number of convertible debt instruments models by removing major separation models required under current GAAP. In other words, except for convertible debt instruments with conversion features accounted for as derivatives, most convertible debt instruments will be accounted for as one instrument and their interest expense recorded in the income statement will approximate the cash coupon interest expense.  Convertible preferred stock models will also be simplified.
  • Remove certain settlement conditions (such as settlement in unregistered shares) that disqualify an equity contract for a scope exception from derivative accounting.  
  • Require that share-settlement be included in the diluted EPS calculation for both convertible instruments and equity contracts when those contracts include an option of cash settlement or share settlement; and align the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method.
The final standard is expected to be effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard would be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption would be permitted.

The views expressed in this article do not necessarily reflect the views of the FASB. Official positions of the FASB are arrived at only after extensive due process and deliberation.