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FASB Issues Update on Certain Financial Instruments with Liabilities and Equity Characteristics

Following recommendations from the Private Company Council, the Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) 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 simplifies accounting for select financial instruments with down round features, a rule in an equity-linked financial instrument or embedded feature that offers a downward adjustment of the present exercise price based on future equity offerings. For public businesses, the amendments under Part I of the update apply to fiscal years, and interim periods during those fiscal years, starting after December 15, 2018. All other entities must apply the amendments under Part I for fiscal years starting after December 15, 2019, and interim periods during fiscal years starting after December 15, 2020. All entities can adopt the amendments early, including in an interim period.

Part II addresses an indefinite deferral available to private companies with mandatorily redeemable financial instruments by providing a scope exception instead. Part II of the update does not require transition guidance because those changes have no accounting effect.

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