The Financial Accounting Standards Board (FASB) has published a proposed Accounting Standards Update (ASU) intended to improve the application and relevance of accounting guidance related to induced conversions of convertible debt instruments.

The proposed ASU is based on a consensus of the FASB’s Emerging Issues Task Force (EITF). Stakeholders are encouraged to review and provide input on the proposed ASU by March 18, 2024.

When the terms of a convertible debt instrument are changed to induce conversion of the instrument, Subtopic 470-20, Debt—Debt with Conversion and Other Options, sets forth guidance for determining whether the transaction should be accounted for as an induced conversion (as opposed to a debt extinguishment).

Stakeholders provided input to the FASB that it is unclear how to apply the existing induced conversion guidance to convertible debt instruments with cash conversion and other features that have become prevalent in the market since this guidance was originally issued.

The proposed ASU would address this feedback by clarifying the requirements for determining whether certain settlements of convertible debt instruments, including convertible debt instruments with cash conversion features, should be accounted for as induced conversions.

The proposed ASU, including information on how to submit comments, is available at www.fasb.org.

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