FASB Supports Improvements to Convertible Instrument Disclosures

February 26, 2019

At last week’s meeting, the Financial Accounting Standards Board (“FASB”) announced support for making several improvements to convertible instrument disclosures. Improvements include changing the format in which convertible instruments information is disclosed to investors. The FASB decided not to require such disclosures to be presented in a tabular format, instead opting to give issuers the freedom to select between a tabular or narrative disclosure.

Last week’s decision is part of the board’s ongoing efforts to streamline its liabilities and equities accounting guidance. Many critics believe the guidance under FASB Accounting Standards Codification 480, Distinguishing Liabilities From Equity, features too many internal irregularities. In response, the FASB staff members suggested several convertible instrument disclosure improvements. The staff’s recommendations received unanimous approval from the board.

The recommendations include adding a disclosure objective for convertible preferred shares and convertible debt, amending guidance on certain terms and features, aligning the disclosure guidance among contingently and other convertible instruments, and unifying the guidance for convertible debt and convertible preferred shares.

As for giving users the option to choose between a tabular or narrative disclosure, board members ordered staff to develop illustrative examples for the implementation guidance on both formats. FASB member Marsha Hunt believes the illustrations should help evolve best practice and give people room for judgment.