Decisions Reached on Distinguishing Liabilities from Equity Project

May 18, 2017

At its May 10 meeting, the Financial Accounting Standards Board (“FASB”) reached the following decisions on its proposed Accounting Standards Update, Distinguishing Liabilities from Equity (Topic 480): I. Accounting for Certain Financial Instruments with Down Round Features, and 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:

  • Display (Earnings Per Share). Impacting companies within the scope of Topic 260, Earnings Per Share, an earnings per share (“EPS”) numerator modification will be required to income offered to common shareholders in basic EPS for equity-classified freestanding financial instruments. Additionally, any company required to make the EPS modification must disclose it in their balance sheet.
  • Disclosure. Any company required to recognize the EPS modification must disclose the value of the impact of the down round trigger. The FASB also amended the disclosure requirements under Topic 505, Equity, to simplify the application of disclosure requirements to modifications in conversion or exercise costs.
  • Transition. Companies must apply a modified retrospective method during transition to the proposed update. This transition would impact outstanding instruments as of the effective date of the change, in addition to a cumulative-effect adjustment to the opening balance of retained earnings during the fiscal year or interim period of adopting the final guidance. A full retrospective method of transition will also be available for companies.
  • Effective Date. Public companies will have to apply the final guidance to fiscal years, and interim periods within those years, starting after December 15, 2018. All other companies must apply the final guidance to fiscal years starting after December 15, 2019, and interim periods within those years starting after December 15, 2020. Early adoption will be permitted.

FASB staff members were ordered to draft the final guidance for vote.