The Financial Accounting Standards Board released a proposed accounting standards update Wednesday with the goal of enhancing the guidance for financial instruments with the characteristics of liabilities and equity, including convertible instruments and derivatives.
The proposed update aims to improve the guidance for both convertible instruments and the derivatives scope exception for contracts in a company’s own equity. It would reduce the number of accounting models for convertible debt instruments and convertible preferred stock. The proposal would also revise the derivatives scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events. It also would amend the related disclosure and earnings-per-share guidance.
In 2017, FASB undertook a project to address complexity associated with applying U.S. GAAP to certain financial instruments with characteristics of liabilities and equity. It heard from stakeholders that complexity in this area led to a large number of financial statement restatements. Investors and other financial statement users have also pointed to its complexity when trying to understand the results of applying the guidance.
The amendments in the proposed ASU aim to improve those troublesome areas of the current guidance, specifically the guidance related to both convertible instruments and the derivatives scope exception for contracts in an entity’s own equity.
“During the FASB’s agenda consultation project a few years ago, stakeholders described liabilities and equity guidance as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” said FASB chairman Russell Golden in a statement. “We believe the proposed ASU would help reduce complexity and improve understandability in this area while providing financial statement users with more relevant information.”