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FASB Updates Guidance for Assessing Put and Call Options

Impacting companies that invest in or issue debt instruments (or hybrid financial instruments with a debt host) with embedded call (put) options, the Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.

The Update clarifies the steps companies are required to take when assessing whether or not the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. When a call (put) option is contingently exercisable, a company does not have to determine whether the event that causes the ability to employ a call (put) option is linked to interest rates or credit risks.

Public companies must implement the new requirements for fiscal years, as well as any interim periods within, starting after December 15, 2016. All other companies must implement the new requirements for fiscal years starting after December 15, 2017, and any interim periods within those years starting after December 15, 2018.

Early adoption is permitted, including for interim periods. If early adoption is selected in an interim period, companies must reflect any adjustments as of the start of the fiscal year that includes the interim period.

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