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.
Keywords: Americas, US, Banking, Securities, Financial Instruments, Liabilities and Equity, GAAP, Convertible Instruments, Derivatives and Hedging, Accounting Standards Update, IFRS 9, Accounting, Reporting, FASB
Previous ArticleESRB Paper Presents Alternative Approach to EBA Stress Test Proposal
BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.
In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.