FASB Simplifies Accounting for Convertible Instruments

Potentially reduce cost and complexity for preparers and auditors


News Finance

FASB issued a new standard Wednesday that is designed to simplify financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.

The board reduced the number of accounting models for convertible debt instruments and convertible preferred stock. This will result in fewer embedded conversion features being separately recognized from the host contract compared with current GAAP. More convertible debt instruments will be reported as a single liability instrument, and more convertible preferred stock will be reported as a single equity instrument with no separate accounting for embedded conversion features.

FASB also made targeted changes to the disclosures for convertible instruments and earnings-per-share guidance.

In addition, the new standard removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. This will permit more equity contracts to qualify for the exception. Meanwhile, the diluted earnings-per-share calculation was simplified in certain areas.

FASB Vice Chairman James Kroeker said in a news release that the standard is an important step in simplifying a complex area of accounting guidance that has been a frequent source of restatements.

“We expect it to improve comparability of information for financial statement users and reduce cost and complexity for preparers and auditors,” Kroeker said.

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Source: Journal Of Accountancy

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