FASB Issues Guidance on Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock (April 24, 2026)

FASB Issues Guidance on Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock

Overview

On April 23, 2026, the FASB issued ASU 2026-01,1 which amends ASC 5052 to add guidance on how an issuer should measure paid-in-kind (PIK) dividends on equity-classified preferred stock. Under the amendments, entities are required to measure such dividends by multiplying the stated PIK dividend rate by the liquidation preference of the shares.

The ASU’s requirements are limited to the measurement of PIK dividends and do not address recognition. By providing clear guidance on how to measure PIK dividends, the Board expects that comparability between entities will improve.

Background

The amendments began as a project of the Emerging Issues Task Force (EITF) on the measurement of PIK dividends on equity-classified preferred stock. The project was intended to address the absence of authoritative guidance on how an issuer should measure PIK dividends on such stock and the resulting diversity in practice related to the accounting for these transactions.

At its March 25, 2025, meeting, the EITF voted to recommend that the FASB (1) consider certain improvements to the accounting requirements and (2) add a project on this issue to its technical agenda. The Board added the project in April 2025 and issued a proposed ASU 3 in September 2025.

Main Provisions

Scope

Under the ASU, ASC 505-10-15 is amended to:

Add guidance on PIK dividends on equity-classified preferred stock (including temporary-equity classified preferred stock4).
Clarify that issuers should apply the guidance on PIK dividends when an issuer satisfies dividend obligations by doing either of the following:
- “Delivering to the holder additional preferred stock with the same terms as the original preferred stock.”
- “Increasing the value of the original preferred stock in accordance with the preferred stock agreement (for example, by increasing the original preferred stock’s liquidation value).”
Clarify that the guidance does not apply if the dividends are designed to deliver a fixed monetary value to the holder (e.g., an obligation to issue a variable number of shares with a fixed value of $1,000).
Clarify that the guidance does not apply to deemed dividends or to transactions that represent deemed dividends (e.g., certain redemptions of preferred stock).

The ASU does not provide guidance on when an entity should recognize PIK dividends. Accordingly, the amendments apply only after an entity has concluded that it meets the conditions for recognition and therefore must determine how to measure such dividends. See Section 10.3.4.2 of Deloitte’s Roadmap Distinguishing Liabilities From Equity for guidance on dividend recognition.

Measurement

The ASU amends U.S. GAAP to add ASC 505-10-30-1, which requires entities to measure PIK dividends on the basis of their “rate stated in the preferred stock agreement.” Such agreements often specify this rate as a percentage of the liquidation preference or stated value of the preferred stock, although these designations may vary. This liquidation value reflects the amount owed to the holder of the preferred stock upon certain liquidation or deemed liquidation events or upon conversion into another class of equity (e.g., common stock).

Often, the liquidation preference is initially equal to the original issuance price of preferred stock; however, if the preferred stock was issued at a discount, the original issuance price may differ from the liquidation preference. An entity should evaluate the specific terms and features of its preferred stock to determine the amount to which to apply the stated dividend rate.

Connecting the Dots

In accordance with the guidance before the ASU’s adoption, an entity commonly assesses whether PIK dividends are discretionary or nondiscretionary when determining its PIK dividend measurement approach. Under the ASU, no such distinction is necessary since both are treated in the same manner.

The examples5 below illustrate the application of the ASU in various scenarios.

Example 1

An entity issues 1 million shares of convertible preferred stock with a stated liquidation preference of $10 per share. The shares are issued for $10 per share for total proceeds of $10 million ($10 × 1 million = $10 million). Dividends accrue quarterly to the liquidation preference of the preferred stock, whether or not declared, and must be paid in kind. The stated annual dividend rate is 6 percent of the liquidation preference (or 1.5 percent per quarter).

At the end of the first quarter, the entity recognizes total PIK dividends of 15,000 shares:

$10 million [liquidation preference] × 1.5% [quarterly dividend rate] = $150,000.
$150,000 ÷ $10 [liquidation preference per share] = 15,000 [preferred shares].

The entity would therefore recognize a PIK dividend amount of $150,000 (15,000 shares × $10 per share liquidation preference).

Example 2

Assume the same facts as in Example 1, except that in exchange for the $10 million proceeds, the entity issued both preferred stock and equity-classified warrants. The warrants and the preferred stock each represent freestanding financial instruments. The preferred stock is initially recorded with a carrying value of $9 per share ($9 × 1 million = $9 million) since $1 million of proceeds was allocated to the warrants.

In this scenario, the entity would also recognize a PIK dividend amount of $150,000 (15,000 shares × $10 per share liquidation preference). That is, the recognition of an issuance discount on the preferred stock does not affect the measurement of the PIK dividends as they accrue or are declared.

Example 3

Assume the same facts as in Example 1, except that dividends that are paid in kind accrue at the rate of 8 percent of the liquidation preference (2 percent per quarter). Dividends declared and paid in cash would be paid on the basis of a dividend rate of 6 percent of the liquidation preference (or 1.5 percent per quarter).

At the end of the first quarter, if the entity has not declared cash dividends, the entity recognizes total PIK dividends of 20,000 shares:

$10 million [liquidation preference] × 2.0% [quarterly PIK dividend rate] = $200,000.
$200,000 ÷ $10 [liquidation preference per share] = 20,000 [preferred shares].

In this scenario, the entity would therefore recognize a PIK dividend amount of $200,000 (20,000 shares × $10 per share liquidation preference).

Effective Date and Transition

The ASU’s amendments are effective for all entities for annual reporting periods beginning after December 15, 2026, and for interim reporting periods within those annual reporting periods.

An entity may apply the amendments on either (1) a prospective basis or (2) a modified retrospective basis for equity-classified preferred stock instruments that are outstanding as of the initial application date. Early adoption is permitted for interim and annual periods for which financial statements have not been issued or made available for issuance. An entity adopting the amendments in an interim period would be required to adopt them as of the beginning of the annual reporting period that includes that interim period.

Contacts

	Jamie Davis Audit & Assurance Partner Deloitte & Touche LLP +1 312 486 0303 jamiedavis@deloitte.com		James Christenson Audit & Assurance Manager Deloitte & Touche LLP +1 617 437-2653 jachristenson@deloitte.com
	Michael Riso Audit & Assurance Manager Deloitte & Touche LLP +1 813 769 6190 miriso@deloitte.com

Footnotes

FASB Accounting Standards Update (ASU) No. 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock.

FASB Accounting Standards Codification (ASC) Topic 505, Equity.

FASB Proposed Accounting Standards Update, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock.

In accordance with the SEC staff announcement in ASC 480-10-S99-3A (originally issued as EITF Topic D-98, “Classification and Measurement of Redeemable Securities”).

Examples 1 and 2 are adapted from paragraphs 36 through 41 of the EITF’s March 25, 2025, Issue Summary No. 1, “Accounting for Paid-in-Kind Dividends on Preferred Stock.”

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