Liabilities and Equity Targeted Improvements Proposed

January 4, 2017

The Financial Accounting Standards Board (“FASB”) has issued for comment the proposed Accounting Standards Update, Distinguishing Liabilities from Equity (Topic 480): I. Accounting for Certain Financial Instruments with Down Round Features; 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.

The proposal is split into two parts. In Part I, the FASB proposes when an entity determines certain financial instruments are to be classified as liabilities or equity instruments, they should not include the down round feature when measuring whether the financial instrument is indexed to its own stock. An entity, however, would disclose the impact of the down round feature in equity as a dividend (equity classification) or through a charge to net income (liability classification).

Financial instruments with down round features that are triggered in the reporting period must be disclosed, as well as the value of the impact of the down round feature being triggered, and the financial statement line item wherein the impact is recorded.

Part II of the proposal re-characterizes the indefinite deferral of certain requirements under Subtopic 480-10 considered pending content in the Codification, to a scope exception. The proposed amendments under Part II will not impact accounting.

Comments on the proposal are due Monday, February 6, 2017.