FASB Simplifies Accounting for Certain Financial Instruments
FASB issued a new Accounting Standards Update (2020-06) to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. This update concerns topic 470 on debt with respect to conversion and other options and topic 815 on derivatives and hedging with respect to contracts in entity’s own equity. FASB issued this Accounting Standards Update to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, FASB focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity.
The Accounting Standards Update simplifies accounting for convertible instruments by removing major separation models required under the current GAAP. Consequently, 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. The Accounting Standards Update removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The Accounting Standards Update also simplifies the diluted earnings per share calculation in certain areas.
The Accounting Standards Update is effective for public business entities that meet the definition of a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year.
FASB had published an exposure draft on the proposed Accounting Standards Update in July 2019. In the July 2019 exposure draft, FASB had also proposed simplifying the accounting for equity contracts by reducing form-over-substance-based accounting conclusions that are driven by remote contingent events in the assessment of the derivatives scope exception. However, due to the mixed feedback from stakeholders during the public comment period, FASB has decided not to include those proposed changes in the Accounting Standards Update. Consequently, FASB plans to continue to explore improvements on this aspect of the guidance in a separate Phase 2 project.
Related Links
Keywords: Americas, US, Banking, Securities, Financial Instruments, Liabilities and Equity, GAAP, Convertible Instruments, Derivatives and Hedging, Accounting Standards Update, IFRS 9, Accounting, Reporting, FASB
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
ESRB Paper Presents Alternative Approach to EBA Stress Test ProposalRelated Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.