FASB SIMPLIFIES ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF LIABILITIES AND EQUITY
New standard based on recommendations from the Private Company Council
Norwalk, CT, July 13, 2017—The Financial Accounting Standards Board (FASB) today issued an Accounting Standard Update (ASU)
that simplifies the accounting for certain financial instruments with
down round features—a provision in an equity-linked financial instrument
(or embedded feature) that provides a downward adjustment of the
current exercise price based on the price of future equity offerings.
The ASU is based on recommendations from the Private Company Council (PCC).
Down round features are common in warrants, convertible preferred
shares, and convertible debt instruments issued by private companies and
development-stage public companies. Private company and other
stakeholders expressed concern that current accounting guidance creates
unnecessary cost and complexity for organizations that issue financial
instruments with down round features by requiring, on an ongoing basis,
fair value measurement of the entire instrument or conversion option.
It creates, they assert, unnecessary income statement volatility
associated with changes in value of a company's own share price, and
does not reflect the economics of the down round feature, which exists
to protect certain investors from declines in the issuer's share price
under certain circumstances.
The new ASU addresses these concerns by requiring companies to disregard
the down round feature when assessing whether the instrument is indexed
to its own stock, for purposes of determining liability or equity
classification. Companies that provide earnings per share (EPS) data
will adjust their basic EPS calculation for the effect of the feature
when triggered (that is, when the exercise price of the related
equity-linked financial instrument is adjusted downward because of the
down round feature) and will also recognize the effect of the trigger
within equity.
The ASU also addresses navigational concerns within the FASB Accounting Standards Codification®
related to an indefinite deferral available to private companies with
mandatorily redeemable financial instruments and certain noncontrolling
interests—one that created significant "pending content" in the
Codification. To address this concern, the Board decided to reclassify
the indefinite deferral as a scope exception, which does not have an
accounting effect.
The provisions of the new ASU related to down rounds are effective for
public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018. For all other
organizations, the amendments are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted for all
organizations.
The final ASU is available at www.fasb.org.
About the Financial Accounting Standards Board
Established in 1973, the FASB is the independent, private-sector,
not-for-profit organization based in Norwalk, Connecticut, that
establishes financial accounting and reporting standards for public and
private companies and not-for-profit organizations that follow Generally
Accepted Accounting Principles (GAAP). The FASB is recognized by the
Securities and Exchange Commission as the designated accounting standard
setter for public companies. FASB standards are recognized as
authoritative by many other organizations, including state Boards of
Accountancy and the American Institute of CPAs (AICPA). The FASB
develops and issues financial accounting standards through a transparent
and inclusive process intended to promote financial reporting that
provides useful information to investors and others who use financial
reports. The Financial Accounting Foundation (FAF) supports and oversees
the FASB. For more information, visit www.fasb.org.